Gearing Up for Growth - Fujitsu Global · Gearing Up for Growth FUJITSU LIMITED ... Next is our Device Solutions segment. Electronic devices are central to our technology, and in

Gearing Up for GrowthFUJITSU LIMITED

Annual Report 2006

FUJIT

SUL

IMIT

ED

Annual R

eport2006

Financial Highlights ............................................................................. 1

A Message from Management ............................................................ 2

A Conversation with the President .................................................... 4

Growth through Global Business Expansion ................................... 10

Business Overview ................................................................................. 18

Operational Review and Outlook ....................................................... 20

Research & Development .................................................................... 28

Intellectual Property ............................................................................. 30

Social and Environmental Activities .................................................. 32

Management ........................................................................................... 34

Corporate Governance ......................................................................... 35

Business and Other Risks .................................................................... 40

Financial Section ................................................................................... 44

Principal Subsidiaries and Affiliates .................................................. 83

Shareholders’ Data ................................................................................ 83

Contents

Forward-looking Statements* This annual report may contain forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause

actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results may differ materially from those projected or implied in the forward-lookingstatements due to, without limitation, the following factors: general economic and market conditions in key markets (particularly in Japan, North America and Europe); rapid changes in the high-technology market (particularly semiconductors, PCs, etc.); fluctuations in exchange rates or interest rates; fluctuations in capital markets; intensifying price competition; changes in market positioningdue to competition in R&D; changes in the environment for the procurement of parts and components; changes in competitive relationships relating to collaborations, alliances and technical provisions;potential emergence of unprofitable projects; and, changes in accounting policies.

1Annual Report 2006

Yen U.S. Dollars(millions) (thousands)

(excluding inventory turnover ratio, D/E ratio)

Years ended March 31 2004 2005 2006 2006

Net sales ¥4,766,888 ¥4,762,759 ¥4,791,416 $40,605,220Operating income 150,342 160,191 181,488 1,538,034Income before income taxes and minority interests 157,018 223,526 118,084 1,000,712Net income 49,704 31,907 68,545 580,890

Total assets ¥3,865,589 ¥3,640,198 ¥3,807,131 $32,263,822Shareholders’ equity 827,177 856,990 917,045 7,771,568

Inventories 521,126 478,510 408,710 3,463,644Inventory turnover ratio 8.53 9.53 10.80

Interest-bearing loans ¥1,277,121 ¥1,082,788 ¥ 928,613 $ 7,869,601D/E ratio (times) 1.54 1.26 1.01

Note: The U.S. dollar amounts stated above and elsewhere in this report have been translated from yen, for readers’ convenience only, at the rate of ¥118 =US$1, which was the approximate rate on the Tokyo Foreign Exchange Market at March 31, 2006.

� Financial HighlightsFujitsu Limited and Consolidated Subsidiaries

2004

2005

2006 928

1,277

1,082

1.01

1.54

1.26

Interest-bearing Loans (Billions of Yen)D/E Ratio (Times)

■ Interest-bearing Loans and D/E Ratio

2004

2005

2006 408

521

478

10.80

8.53

9.53

Inventories (Billions of Yen)Inventory Turnover Ratio (%)

■ Inventories and Inventory Turnover Ratio

2004

2005

2006 4,791

4,766

4,762

■ Net Sales

2004

2005

2006 181

150

160

3.8

3.2

3.4

Operating Income (Billions of Yen)Operating Income Margin (%)

■ Operating Income and Operating Income Margin

(Billions of Yen)

2 Fujitsu Limited

� A Message from Management

3Annual Report 2006

The information technology market is undergoing a sea change—as tech-

nologies converge and become increasingly complex, and services become more

diverse—while at the same time expanding on a global scale. Of course it is

continual advances in technology that will drive further growth in this mar-

ket. This will revolutionize companies, society, and indeed all our lives. We

are proud that Fujitsu is one of only a handful of companies capable of offer-

ing solutions that can convert IT-enabled innovation into business value for

customers worldwide.

In the current fiscal year, ending in March 2007, our overarching objec-

tive is to deliver sustained growth by transforming Fujitsu into a truly power-

ful company. To achieve this, we will work even harder to meet the four key

challenges we focused on in fiscal 2005: strengthening our existing businesses,

creating and cultivating new businesses, reforming our organization and

approach, and reforming our management systems.

Left: Naoyuki AkikusaChairman

Right: Hiroaki KurokawaPresident

4 Fujitsu Limited

� A Conversation with the President

Our operations were previously categorized under Software & Services, Plat-

forms, and Electronic Devices, in other words, from the producer’s perspec-

tive. We decided to change these business segment classifications to make

them more customer-centric and ensure they better reflect the nature of our

businesses. We have also added the term “solutions” to each segment to clearly

emphasize our business objective at Fujitsu—provide solutions that convert

technology into business value for our customers.

First, I’d like to talk about our Technology Solutions segment. IT systems only begin to generate

value once they are in operation and actually being utilized. But if we just talk to customers about IT

services or servers, they see them as nothing more than structural elements of their IT operations. With

IT becoming increasingly complex, we have decided to focus on providing value by helping to weave

together these various elements for customers. So, aiming to link technology with actual usage as our

business objective, we have brought together Services and System Platforms under the same Technol-

ogy Solutions segment.

Next is our Device Solutions segment. Electronic devices are central to our technology, and in this

area we have nearly completed our shift in focus to logic LSI devices. Going forward, we plan to leverage

our strengths in software and verification and analysis technologies to offer customers solutions that

deliver even greater added value.

Our other main segment is Ubiquitous Product Solutions. Hard disk drives (HDDs), personal com-

puters (PCs) and mobile phones are unique markets in their own right and are characterized by intensi-

fying global competition. Focusing on achieving even greater sophistication in our supply chain

management and in manufacturing innovation, we created this new segment in order to pursue further

advances in these operations as independent businesses.

� What prompted the change to Fujitsu’s business segments in fiscal 2005?

Consolidated net sales in fiscal 2005 grew just 0.6% year on year to ¥4,791.4

billion. This primarily reflected strong growth in overseas sales, particularly

in optical transmission systems in North America and outsourcing services

in the UK, as opposed to Japan, where sales of servers and in some other

businesses were sluggish. Buoyed by higher revenues from overseas busi-

ness, as well as success in enhancing manufacturing innovation to cut costs,

and reducing losses from loss-generating systems integration projects in Japan,

we reported an increase in operating income of 13.3%, to ¥181.4 billion.

� How would you assess Fujitsu’s performance in fiscal 2005?

5Annual Report 2006

Our approach of implementing strategies tailored to each market resulted in

sales and earnings growth in each of our key overseas geographies. In North

America, our optical transmission systems business aimed at communications

carriers and our services business performed strongly. In Europe, we posted

robust growth in sales of PRIMEPOWER UNIX servers and other server-

related products, while in services we achieved steady growth in sales and earn-

ings, particularly in the UK, by continuing our success in winning new large-scale

outsourcing contracts. This is an area where we have continued high expectations going forward.

The picture was different in Japan, where sales of server-related products and PCs declined, and

services were impacted by sluggish corporate IT investment. However, our server-related business

regained some strength in the second half of the fiscal year as we rolled out initiatives to boost sales

centered on PC servers. With respect to services in Japan, I believe there are still plenty of opportunities

to increase earnings by reinforcing our high-margin outsourcing services, and by targeting markets with

potential for growth, such as the small and medium-size enterprise sector.

� What were the reasons behind Fujitsu’s growth overseas and

its relatively weak performance in Japan?

One thing is very clear in my mind: Fujitsu must become a company capable of consistently generat-

ing profits. I believe this is the foundation for realizing growth. Increasing sales remains an important

issue that we have to tackle, but I think our results for fiscal 2005 show that we are steadily becoming a

company that can deliver stable profits.

Another feature of our performance in fiscal 2005 was the progress we made in strengthening our

financial position, as illustrated by improvements in our inventory turnover and D/E ratios. I think this

shows that our efforts to transform Fujitsu into a truly powerful company are starting to bear fruit.

Since announcing a medium-term vision for Fujitsu in 2004, we have been

vigorously pursuing four key challenges: strengthening our existing businesses,

creating and cultivating new businesses, reforming our organization and

approach, and reforming our management systems. In the first area, we have

been striving to realize a virtuous cycle of management anchored by efforts to

reduce costs. Specifically, we have worked to reduce costs by thoroughly

improving our design and development, production, and procurement

� Please tell us about initiatives to realize

your medium-term vision.

6 Fujitsu Limited

I think that IT investment in Japan is generally on a recovery trend, particu-

larly in the industrial, retail and financial services sectors. It is important

that we tap into this trend, but I also want to build an earnings structure

that is resilient to external factors. Specifically, we will work to raise profit-

ability in our systems integration business, which accounts for around 60%

of our services business in Japan, and to increase the ratio of high-margin

packaged services and operational services in our services business by mak-

ing new proposals to clients. Through these and other measures, we will strive to increase profit margins

across our services business.

In systems integration, we will continue to bolster our project management capabilities. In recent

years we have had to tackle the issue of loss-generating projects. Compared to the previous two years we

have been able to achieve a marked reduction in such projects by reinforcing our systems integration

assurance capabilities to ensure rigorous project risk management. Other initiatives have included

� How do you plan to grow the services business in Japan going forward?

processes, and enhancing productivity in software development. Profits generated through these reforms

are then reinvested in design and development to create a virtuous cycle. In this way, we are striving to be an

invaluable partner to customers. Based on this thinking, we have sought to transform our whole approach

to how we do business, and backed this up with structural reforms. In fiscal 2006 we plan to complete the

challenges we set forth in this medium-term vision, striving to realize further business expansion by focus-

ing on aggressively developing our business outside Japan, creating new businesses and other measures.

Focus on basics: Customer-centric perspective/speed/timely delivery/quality/costReinvigorate product-related business units: Renew focus on technologyReenergize manufacturing: Toyota Production System reforms to manufacturing and personnel developmentTeam-building measures: Overhaul management by objective system

FY2006FY2001 FY2002 FY2003 FY2004 FY2005

Share sense of urgencyFocus on realities of front linesPromote information disclosure

Jan. 2004: Medium-term objectives set

Jun. 2004: The FUJITSU Way revised

Expand Business

Enhance efforts in overseas and SME marketsCreate new businessesCultivate new and existing customersReform

Structure

Integrate sales and SE teamsReorganize/merge affiliatesFocus on logic LSI in Electronic Devices business

Reform Approach & Actions

■ Initiatives to Date

7Annual Report 2006

We eschew a one-size-fits-all global business approach and pursue instead business development strat-

egies tailored to specific regional markets. Strategies for our key geographic markets are discussed on

pages 10 and 11.

� What are you doing to expand Fujitsu’s business globally?

upgrading project management using web-based tools, among other methods, and concluding customer

contracts based on percentage-of-completion standards. These measures have allowed both Fujitsu and

our customers to visualize project progress and clearly delineate our respective responsibilities.

In fiscal 2005, we experienced some painful incidents related to the operation of Fujitsu systems. With

the benefit of hindsight, I think we can see now that we tended to place too much emphasis on system

design and development at the expense of operation, and we have reflected seriously on this issue. With

any IT system, value starts with operational stability. We therefore must reaffirm the importance of sys-

tem operations and work to raise operational quality by enhancing training for our personnel, improving

business processes, and implementing design and development from the operational standpoint.

I’d like to answer the question in two parts by talking first about System

Products, which includes our range of servers, and then Network Products,

which covers network equipment.

Our System Products business in Japan is currently battling a tough busi-

ness climate of falling prices, particularly in the server market, where price

competition is increasingly fierce. Especially for PC servers, it is essential

that we further strengthen sales, and we will strive to do so by working with

partners to enhance our sales channels and by using the internet to expand direct sales to customers.

Outside Japan, our high-quality, high-performance servers are selling well, particularly in Europe

and North America, where they have won a strong reputation among customers in the financial services

and communications sectors. We plan to build on this success by working to boost sales further. In fiscal

2005, we concluded a deal with Electronic Data Systems Corporation (EDS) of the US, the world’s

second biggest IT services vendor, under which EDS will utilize our PRIMEQUEST mission-critical

IA server as part of its solutions infrastructure. In addition, we have been steadily opening Platform

Solution Centers in various locations around the world. These centers act as one-stop pre-verification

and evaluation sites providing a whole range of customer support, from consulting to actual system

verification and performance testing.

� What initiatives are you taking to strengthen sales in System Platforms?

8 Fujitsu Limited

■ Building a Global PSC* NetworkProviding comprehensive supportclose to customer operating sites

2002: Germany

Nov. 2004: UK

Dec. 2004: Japan (Tokyo)

May 2005: Singapore,US (California)

Sep. 2005: South Korea

Apr. 2006: China (Shanghai)

Jun. 2006: China (Hong Kong)

* Platform Solution Center

In Network Products, in addition to steady expansion of our business in

North America, in Europe we signed an agreement with BT Group plc as a

preferred supplier for its 21st Century Network program. Looking ahead, we

intend to offer the world’s most advanced technologies as a partner to leading

communications carriers in Japan, the US and Europe.

We are forecasting an 8.5% increase in sales in fiscal 2006, driven by further

expansion of our overseas business and initiatives to tap into recovering IT spend-

ing in Japan. In recent years, our emphasis has been on enhancing operational

efficiency. Now, we intend to aggressively invest in growth fields to achieve sus-

tained profitable growth. In fiscal 2006, we are budgeting ¥350.0 billion in capital

expenditure, focused primarily in Device Solutions and Technology Solutions.

This represents a year-on-year increase of 40.1%. Still, we are committed to post-

ing higher earnings and are targeting an increase in operating income to ¥190.0 billion.

In Device Solutions, we are channeling resources into logic LSI products. In our world-class advanced

logic LSI business, we are front-loading investment to meet surging demand from existing customers. In

fiscal 2006, we plan to invest ¥180.0 billion, primarily in 300mm wafer semiconductor production facili-

ties (Fab No. 1 and Fab No. 2) at our Mie Plant. In Technology Solutions, we will invest a total of ¥120.0

billion to bolster our domestic and international outsourcing, server, and next-generation network busi-

nesses, while in Ubiquitous Product Solutions we will invest ¥30.0 billion in our HDD, PC and mobile

phone operations.

� Please explain Fujitsu’s investment strategy in fiscal 2006.

181 249 350

17017093

0

100

200

300

240 241 255

2276

1765

21115

1993

20180

30120

Capital expenditure

2005 (Actual) 2006 (Actual) 2007 (Plan)

Consolidated FCF** Free cash flow for business operations, excluding sales of shareholdings and other items

(Billions of Yen)

■ Investing for GrowthCapital and R&D expenditure

■ R&D expenditure

Capital expenditure■ Corporate and other■ Device Solutions■ Ubiquitous Product

Solutions■ Technology Solutions

Years ended March 31

9Annual Report 2006

Our Values

Code of Conduct

The FUJ I TSU Way : Turning Dreams into Reality

Our MissionFujitsu continually seeks to create new value by providing customers with comprehensive solutions comprising highly reliable high-performance products and services based on powerful technologies. Through this, we aim to grow, realize profits and foster mutually beneficial relationships in our communities worldwide.

Customers

Our dream is to make our cus-tomers’ dreams

come true

Employees

Every one of us has a leading role to play

Quality

We aim to earn customers’ trust

in Fujitsu

Environment

We consider environmental impact in all that we do

Profits & Growth

We strive to meet the expectations

of customers, employees and shareholders

Respect human rights Protect intellectual property

Comply with laws and regulations Reject unethical behavior

Maintain confidentiality Act with fairness in our business dealings

Company-wide ActivitiesManufacturing innovation,

environmental initiatives, etc.

Business PolicyPresident’s management direction

Formulated at business unit levelBusiness Plan

Fujitsu is gearing up for a new stage of growth driven by global expansion of

our business and other measures. It goes without saying that our sharehold-

ers are a vitally important stakeholder group and that we are constantly seek-

ing to raise shareholder value. We believe that improvement in shareholder

value is fundamentally derived from sustained growth in earnings. With respect

to profits generated by this growth, along with generating stable returns for

shareholders, we will strive to secure sufficient internal reserves to strengthen

our financial position and to support active business development for further

growth and improved profitability in the medium to long term.

A string of corporate scandals in recent years has highlighted the importance

of corporate ethics. We have formulated The FUJITSU Way, a common set of

principles guiding the individual

actions of every employee in the

Fujitsu Group. We practice these

principles in all our business activi-

ties. Guided by The FUJITSU Way

and all that it stands for, I will sin-

cerely work to ensure sound man-

agement while striving to realize

sustained profitable growth. Please

look forward to great things from

Fujitsu as we move back on the path

to growth.

� Could you please close with a few words for shareholders,

including your thinking on shareholder value?

10 Fujitsu Limited

EuropeWe will work to accelerate the growth of FujitsuServices, mainly focused on outsourcing services,and Fujitsu Siemens Computers, which primarilyhandles a range of servers and PCs. In addition tomaintaining and enhancing its position in the UKpublic sector, Fujitsu Services is striving to capturea larger share of private-sector demand. FujitsuSiemens Computers, having acquired the productsupport division of Siemens Business Services, aSiemens AG subsidiary, now has an integrated glo-bal support framework extending from product sup-ply to maintenance services.

Asia, Australia andOther RegionsIn Asia and Australia, we will develop solutionsbusinesses carefully tailored to the characteristicsof individual country markets. In China, we willprovide support to Japanese automakers, consumerelectronics manufacturers and other customers asthey roll out their strategies in the country. Thiswill give us a foothold in the market to supportfuture business expansion.

2002

2003

2004

2005

2006

Net Sales (Billions of Yen)Operating Income Margin (%)

632

605

543

563

596

3.6

–3.0

0.7

1.2

2.0

2002

2003

2004

2005

2006


718

473

464

579

602

1.2

2.7

2.3

2.0

2.1

■ Net Sales* and Operating IncomeMargin (Europe)

■ Net Sales* and Operating Income Margin(Asia, Australia and Other Regions)

Growth through Global

FeatureSection

Rolling out strategies tailored to each region

Years ended March 31* Includes intersegment sales


11Annual Report 2006

The AmericasIn North America, the world’s largest IT servicesmarket, leading IT firms have struggled to domi-nate in the face of market specialization and seg-mentation. Our strategy will be to shift from aproduct-centric approach to operations based onjoint sales activities and the provision of integratedIT solutions. We will also target growth throughalliances, mergers and acquisitions involvingFujitsu Consulting, our principal services companyin North America.

JapanWe plan to shift from our existing focus on systemsintegration toward greater emphasis on expandingoperations-oriented outsourcing services. In sodoing, we will strive to cultivate even deeper rela-tionships with customers while also improving theearnings capabilities of our services. In the small andmedium-size enterprise sector, where we see realopportunities for growth, we plan to build a stron-ger presence by offering a broader range of prod-ucts and services.

2002

2003

2004

2005

2006


3,944

4,161

3,888

4,071

4,024

4.7

1.3

4.1

5.0

4.7

2002

2003

2004

2005

2006


363

446

278

274

298

3.7

–12.9

–6.8

–4.8

1.5 ■ Net Sales* and Operating Income

Margin (Japan)

■ Net Sales* and Operating IncomeMargin (The Americas)

Business Expansion



12 Fujitsu Limited

Helping to create the department store ofthe future—Mitsukoshi, Ltd.—

Working closely with Mitsukoshi, one of Japan’s leading

department stores, to create more convenient and comfortable

retail environments, we jointly tested an inventory management

system for jeans that uses electronic tags. The test was carried

out in conjunction with the Ministry of Economy, Trade and

Industry’s Japan Future Store Project. With this system, tagged

jeans were placed on “smart shelves” equipped with electronic

paper displays that continuously showed updated stock data,

allowing customers to check product availability themselves.

The pilot test confirmed that as well as enhancing con-

venience for customers, the system helped to prevent lost sales

opportunities, thereby contributing to increased sales. Based on

the outcome of the test, Mitsukoshi is deploying a real-time

inventory management system using electronic tags.* Electronic tags are contactless IC devices fitted with an antenna that hold read-

write data. Different than conventional barcodes, they allow users to retrieve infor-mation from a distance of up to a few meters.

Japan

Enhancing safety and economy with a newdelivery truck dispatch and routing system—Seven-Eleven Japan Co., Ltd.—

We constructed a delivery truck dispatch and routing system

for Seven-Eleven Japan, a convenience store operator and one

of Japan’s biggest retailing companies. The system takes fleet

management to another level: instead of simply managing

delivery data, the new enhanced system can analyze individual

driver patterns and provide instructions to them on the move.

The system even recognizes habits that drivers themselves may

not be aware of, giving our client the tools to enhance driving

safety as well as reduce environmental impact by lowering fuel

consumption and CO2 emissions.

Seven-Eleven Japan’s delivery trucks have been fitted with

a GPS-equipped onboard terminal, enabling the real-time man-

agement of fleet position and road condition information. Using

this data, Seven-Eleven Japan’s logistics center can immediately

respond to traffic jams and other situations by providing alter-

native route information, thereby ensuring the safe and reliable

delivery of goods to its convenience stores.

We constructed a delivery truck dispatch and routing sys-tem for Seven-Eleven Japan. This has helped our client toenhance safety and realize delivery operations with lessenvironmental impact by reducing fuel consumption andCO2 emissions.

Fujitsu and Mitsukoshi jointly tested an inventory manage-ment system using jeans equipped with electronic tags*.With this system, stock data is shown on “smart shelf” dis-plays, allowing customers to check availability themselves.

Seeking to Grow Together with CustomersWorldwide as an Indispensable Partner


Deploying an integrated global system tomanage manufacturing and sales costs forindividual products—Tamura Corporation—

Tamura, a leading global manufacturer of electronic compo-

nents, has deployed our enterprise resource planning (ERP*)

package, glovia.com, in its group-wide back office system,

enabling the integrated management of 11 manufacturing and

sales sites around the world. All data related to orders, sales,

costs, procurement and manufacturing received from systems

at each of these sites is now stored and managed on an inte-

grated basis using a database at Tamura’s head office in Japan,

allowing the client to monitor costs and profits for individual

products in real time. This information gives Tamura the power

to make rapid and precise decisions about which products to

prioritize. By supplying and quickly installing advanced ERP

packages optimized to support global operations, we are help-

ing clients to realize dramatic efficiency gains in their opera-

tions worldwide.* Enterprise resource planning: An approach designed to improve management

efficiency by integrating the planning and management of a company’s resources(personnel, assets, finances, time and data) into a single unified system.

Tamura has adopted Fujitsu glovia.com, a suite of extendedERP solutions to integrate the management of orders, salesand costs at 11 overseas sites. The suite allows Tamura tomonitor costs and profits for individual products manufac-tured at each site in real time.

With a large number of employees always on the move,Osaka Gas needed to create a ubiquitous office environ-ment to give its staff the same kind of access to informationas they would have in their regular office. Fujitsu MobileCentrex Service helped realize this environment.

Making the ubiquitous office a reality—Osaka Gas Co., Ltd.—

Osaka Gas, the second biggest firm in the domestic gas indus-

try, has adopted our Mobile Centrex Service to create a ubiqui-

tous office environment that allows its employees to perform

work anytime, anywhere, just as they would if they were in the

office. By using PCs and mobile devices, information can be rap-

idly and reliably transmitted to and from personnel who are

often out of the office or in meetings, thereby helping to realize

a dramatic improvement in employee productivity. This

advanced ubiquitous office system, developed in conjunction

with NTT West, OGIS Research Institute and Osaka Gas

Business Create, also offers the possibility of annual savings of

¥480 million through reduced capital expenditure in telecom-

munications equipment and lower communications costs.

Through a whole host of innovative solutions that realize con-

sistent sound quality and efficient communications, Fujitsu is

at the forefront of a revolution in work styles.

14 Fujitsu Limited

TheAmericas

Helping CBOE stay ahead of huge volumegrowth and fend off competition—The Chicago Board Options Exchange (CBOE)—

CBOE is the world’s largest options exchange. In the face of

increased competition and tremendous growth in volume,

CBOE needed a technology infrastructure that could not only

handle more quotes and trades, but one that could process them

faster than any of its competitors.

To meet this challenge, CBOE turned to Fujitsu to deliver

servers with benchmark-leading performance backed by supe-

rior service and support. Fujitsu PRIMEPOWER servers have

enabled CBOE to build a rock-solid infrastructure that can

handle vastly greater numbers of transactions without latency.

Over a three-year period, CBOE went from peaking at 2,000

quotes per second to peaking at 50,000 per second—all with

close to 100 percent uptime.

The power of Fujitsu has also extended to the trading floor.

Though traders are not required to use Fujitsu Stylistic ST5000

Tablet PCs, these compact pen-based devices have become the

de facto standard for more than 800 market makers on the floor.

“We have worked with Fujitsu for 14 years and knew it has

a superior product roadmap,” said Curt Schumacher, Chief

Technology Officer, System Operations, CBOE. “We also knew

Fujitsu could deliver price, performance and power to meet our

current and future needs.”

Delivering network solutions to meet enhancedsecurity and data transmission needs—Duquesne Light Company—

As a leader in the transmission and distribution of electric

energy, Duquesne Light Company provides superior customer

service and reliability to more than half a million customers in

southwestern Pennsylvania. In 1995, Duquesne purchased

Fujitsu SONET equipment, and as the utility’s network

evolved, we updated it to include our industry-leading

FLASHWAVE products. After 9/11, the US federal govern-

ment required electric utilities to perform complete data backup

at secure locations. In February 2002, Duquesne asked Fujitsu

to design a fully redundant network to meet its new security

and data transmission needs.

Fujitsu was also instrumental in the installation and turn-

up services at two major nodes. In the initial build, the

FLASHWAVE 4300 platform and OC-48 optics were installed

to replace some of the FLM 2400 add/drop multiplexers. Later,

FLASHWAVE 4100 was added to replace the rest of the FLM

2400 equipment. FLASHWAVE 4500 with OC-192 optics was

added to increase redundancy and network capacity for Gigabit

Ethernet over SONET. Duquesne Light’s network has grown

to 18 nodes and has a NETSMART 1500 management system.

As a long-term partner with the Pittsburgh utility, we managed

the entire process from design to maintenance and training.

Fujitsu’s industry-leading, high-performance PRIMEPOWERUNIX servers have helped the CBOE to boost its peak orderprocessing capabilities from 2,000 to 50,000 trades persecond with close to 100 percent uptime.

By deploying Fujitsu FLASHWAVE optical transmissionproducts, Duquesne has built a network with added redun-dancy and capacity connecting head office and each localservice center.


After an urgent request from FEMA to handle calls fromvictims of Hurricane Katrina, Fujitsu set up a disaster reliefcall center in a very tight time frame to help the authoritiesprovide assistance to those affected.

Rapidly establishing temporary disaster reliefcall centers—US Federal Emergency Management Agency (FEMA)—

Fujitsu has extensive experience in call center, data recovery and

other operations, and has assisted many customers to deal with

unfortunate events. Thus, when FEMA called, we were able to

respond quickly because of our extensive experience in helping

other customers in such situations.

In September 2005, FEMA faced an unprecedented chal-

lenge following the devastation caused by Hurricane Katrina,

and later, Hurricane Rita. Hundreds of thousands of people

were displaced and property damage along more than 1,000 miles

of coastline from Florida to Texas was in the billions of dollars.

FEMA needed to immediately deploy temporary disaster

relief call centers to handle the massive volume of calls expected

from the many victims. Responding to an urgent request from

FEMA, we offered our state-of-the-art call center in Dallas,

Texas. On September 6, eight days after Katrina’s landfall,

FEMA awarded Fujitsu a contract to begin handling incoming

calls by September 9 and be fully operational with 1,000 staff

by September 22.

Two days later, on September 8, the call center had begun

operation and by September 9, 150 agents had been trained and

were taking calls. The call center was fully staffed by September

18, well ahead of FEMA’s deadline.

Making a call center of this scale operational on such short

notice required exceptional planning, preparation and respon-

siveness. The Fujitsu Call Center Operations team was proud

to make it happen. At its peak, the Fujitsu call center employed

1,200 staff, operated 16 hours per day, seven days a week, and

responded to more than one million calls from hurricane vic-

tims throughout the affected areas.

16 Fujitsu Limited

A change of direction for the UK Home Office—UK Home Office—

The UK Home Office has had a challenging year, in which it

has had to deal with the London bombings, policing and immi-

gration issues, and a major HQ relocation. These challenges

have increased the focus on the organization’s use of IT, and

therefore its relationship with Fujitsu Services.

Our relationship is long-standing, but had run into diffi-

culties after a series of unacceptable IT outages. Our response

was to work closely with the customer to realign our contract

and processes with their needs and future plans.

The result was a new commercial approach that now enables

the Home Office to achieve rapid change at a reasonable price.

Fujitsu Services now scores 8/10 for service, as against 4/10 in

early 2005, while our service desk receives half as many prob-

lem calls as it did 12 months ago. On the basis of our improved

relationship, we are also jointly developing a new shared ser-

vices approach to IT with potential for deployment across the

Home Office organization.

Fujitsu is working closely with the UK Home Office to imple-ment a new shared services approach to IT across theclient’s entire organization.

Fujitsu has helped Cora to install Europe’s first-ever integratedself-service supermarket checkout system. The client nowplans to extend its use to other sites across France, Belgium,and Luxembourg.

Europe

U-Scan self-checkout establishes footholdamong European retailers—S.A. Cora—

Created and refined in US and Canadian grocery chains, self-

checkout technology has gained such popularity and acceptance

among consumers that European retailers are now taking notice.

Cora began the first European pilot of an integrated self-

checkout solution in May, when the company installed Fujitsu

U-Scan systems at two hypermarkets in Belgium and France.

Jérôme Soblet, Store Director and Corporate SCO Project

Manager at Cora says, “Our main goal with U-Scan is to

improve customer service. Self-checkout lets customers scan,

price-check and pay for their products at their own pace, and it

gives them greater control over their purchases—with the

assistance of a supervisor who handles an island of four self-

service lanes. We are confident that the system will shorten

queues at the cash registers appreciably.”

Following successful pilot projects, U-Scan will be installed

at 59 Cora locations in France, as well as nine stores in Belgium

and two in Luxembourg.

“Fujitsu was the only provider willing to commit itself to

providing a totally integrated solution within the time frame

we set,” added Cora’s Soblet. “The relationship that we’ve had

with Fujitsu goes back a number of years, and its self-checkout

client list is an impressive one.”


Asia, Australiaand

Other Regions

Fujitsu has secured a contract with Australia’s NorthernTerritory Government to provide services and support fordesktop computers using regular flights to remote areas.

Our new CAD system is helping Nissan Techno Vietnam todesign exciting new cars. Post-installation operation andmaintenance is handled by Fujitsu based on an outsourcingarrangement.

Flying technology doctors service remoteregions of Australia—Northern Territory Government—

The Northern Territory in Australia is one of the most sparsely

populated regions in the world. With a land mass the equiva-

lent of France, Italy and Spain combined and a population of

just 200,000, servicing remote areas has always been a major

challenge for the Northern Territory Government. It was this

challenge that Fujitsu faced head on when we bid and were

awarded a four-year, AU$150 million desktop and contract ser-

vices contract with the Northern Territory Government in

March 2006.

Responding to the Northern Territory Government’s

request for improved service delivery to rural and remote areas

of the territory, Fujitsu and local business partners, including

CSG Services and Territory Technology Solutions, provided a

unique level of service and support by using aircraft to service

remote sites. This was facilitated through the introduction of

monthly or bimonthly scheduled site visits to remote regions

and a fly-in response to meet incident resolution service level

agreements. We also worked to improve the effectiveness of

the Northern Territory Government desktop environment for

users and significantly reduce downtime through the use of zero

touch provisioning and a centralized redundant file and print

server solution.

Helping automakers to boost efficiency in newcar development—Nissan Techno Vietnam Co., Ltd.—

In Vietnam, where economic growth continues to drive com-

mercial development, Nissan Techno Vietnam employs skilled

young designers to help develop new Nissan models. Aiming to

create a steady stream of exciting cars, the client asked Fujitsu

to install systems to support an increase in the share of work

done in Vietnam and related expansion in the design team.

The new CAD system that we deployed incorporates

network-attached storage for high-speed processing that real-

izes greater productivity, as well as the flexibility to respond

smoothly to any rapid increase in users in line with business

expansion. Post-installation operation and maintenance is

handled entirely by Fujitsu based on an outsourcing arrange-

ment, thereby ensuring system reliability. Leveraging our

global network, we will support Nissan Techno as it moves

into other regions.

18 Fujitsu Limited

� Business OverviewYears ended March 31

■ Breakdown of Net Sales ■ Net Sales*(Billions of Yen)

■ Operating Income(Billions of Yen)

* Including intersegment sales

TechnologySolutions

UbiquitousProduct

Solutions

Device Solutions

57.4%

20.4%

13.6%

2004

2005

2006 2,983

2,934

2,928

2004

2005

2006 1,059

1,031

948

2004

2005

2006 164

142

139

2004

2005

2006 34

31

31

2004

2005

2006 707

794

804

0 35

2004

2005

2006 33

32

27


Underpinned by a range of highly reliable, high-performance IT systemplatforms employing cutting-edge technologies, we provide best-fit ser-vices for individual client operations and solutions that span the entire ITsystem lifecycle.

Main Products & ServicesSystem Platforms: Full range of servers (mainframe, UNIX, mission-criticalIA, PC), storage systems, various types of software (operating system,middleware), optical transmission systems, and mobile phone base stationsServices: Consulting, systems integration, outsourcing services, networkservices, system support services, information system installation and net-work construction, and dedicated terminal systems and equipment (ATMs,POS systems)

■ Business Overview

Emphasizing speed-to-market and price-competitiveness through highlyefficient manufacturing activities, our PCs, mobile phones, and hard diskdrives are vital to the realization of a ubiquitous networked world.

Main Products & ServicesPCs, mobile phones, storage equipment (hard disk drives, magneto-opticaldisk drives), optical transmitter and receiver modules and other products

Logic LSI chips and related electronic components are core technologiesthat we provide to customers inside and outside the Group as part ofhighly optimized solutions that help to enhance the competitiveness oftheir products.

Main Products & ServicesLogic LSI devices (system LSI, ASICs, microcontrollers, FRAM*1–embeddedlogic), system memory devices (flash memory, FCRAM*2), semiconductorpackages, SAW*3 devices, and other electronic components*1 Ferroelectric random access memory: A nonvolatile memory characterized by low

power consumption, fast write times and numerous read-write cycles. (FRAM is atrademark of Ramtron International Corporation.)

*2 Fast-cycle random access memory: High-speed DRAM that incorporates our origi-nal pipeline operation technology to accelerate memory read-write cycles.

*3 SAW devices boost the performance of mobile phones and other mobile devices andalso help to reduce size and power consumption.

Left: Fujitsu PRIMEQUEST mission-critical IA server offers mainframe-classperformance and reliability. Center: Fujitsu and Cisco Carrier Routing System(CRS-1), jointly developed with Cisco Systems, Inc. Right: Materials Explorermolecular dynamics software supporting nanoscale materials development.

Left: The FR family of 32-bit microcontrollers for consumer electronics products.Right: CPU for our PRIMEPOWER UNIX servers.

Left: Our FMV-DESKPOWER Series of PCs lets users enjoy high-definition TVbroadcasts. Center: The FOMA® F902iS mobile phone is also a full-fledged musicplayer. Right: Fujitsu large-capacity hard disk drives offer high levels of qualityand reliability.

20 Fujitsu Limited

■ Business OverviewThe Technology Solutions business segment comprises prod-

ucts and services primarily for corporate and government cus-

tomers and, within this, the System Platforms sub-segment

encompasses development, manufacture and sales of server-

related systems, network equipment and other products. Sys-

tem Platforms is divided into two categories: System Products,

covering mainframes and open-standard servers including

UNIX, mission-critical Intel Architecture (IA) and PC serv-

ers, and storage systems; and Network Products, including

optical transmission systems and mobile phone base stations.

■ Operating Environment and PerformanceThe worldwide server market continues to grow, paced by

increasing demand for open-standard servers. In Japan, despite

some signs of recovery in IT spending, conditions remained

challenging due to intensifying competition and the impact of

the shift from mainframe to open-standard servers.

In this business climate, System Platforms reported a 2.2%

year-on-year drop in sales to ¥717.6 billion (US$6,082 mil-

lion). This reflected lower sales of System Products, which,

despite relatively robust sales of PC servers and stronger

demand for UNIX servers overseas, faced a highly competi-

tive operating environment in Japan. Network Products sales

rose, thanks to firm demand from communications carriers in

North America for optical transmission systems.

Operating income for the System Platforms sub-segment

declined ¥18.9 billion, to ¥26.2 billion (US$223 million). This

was mainly attributable to sluggish growth in domestic server-

related sales, more intense price competition and higher

expenses related to the development of next-generation serv-

ers and network equipment, which outweighed the positive

impact of higher sales of optical transmission systems.

■ InitiativesIn System Products, we launched our PRIMEQUEST

mission-critical IA server worldwide in April 2005. In a related

development, we concluded a technology alliance agreement

with Electronic Data Systems Corporation (EDS), one of the

world’s leading IT services companies. Under this agreement,

Technology Solutions—System Platforms

363

380

354

353

304 728

734

717

424

System ProductsNetwork Products

2004

2005

2006

System ProductsGrounded on our high-performance, highly reliable mainframe technologies,our PRIMEPOWER UNIX servers (left), PRIMEQUEST mission-critical IA serv-ers (center) and ETERNUS storage systems (right) are capable of meeting awide range of customers’ operational needs.

■ Sub-segment Sales* by Main Product

� Operational Review and Outlook

(Billions of Yen)

Years ended March 31* Including intersegment sales


PRIMEQUEST has become part of the solution infrastruc-

ture for hosting services, legacy migration and other solutions

provided by EDS. In addition, to further expand business

related to our TRIOLE IT infrastructure optimization model

on a global basis, we opened new open-standard system veri-

fication sites called Platform Solution Centers in Singapore,

South Korea, and Hong Kong and Shanghai, China to sup-

port customers’ system construction. These centers comple-

ment existing facilities in Japan, the UK, Germany and

California in the US.

In Network Products, we steadily expanded our business

in North America by leveraging our track record as the region’s

market leader in the next-generation synchronous optical net-

work (SONET) segment. In the UK, Fujitsu was selected by

the BT Group plc, a world leader in next-generation network

deployment, as a preferred supplier in the access domain for

the company’s 21st Century Network program. This deal rec-

ognizes our capabilities and track record in the communica-

tions equipment field. Finally, mobile phone base stations

recorded firm growth during the year, supported by a steady

rise in 3G subscribers in Japan.

■ Issues to Be AddressedIn System Products, amid the continuing trend toward server

consolidation, we will develop our business globally by lever-

aging our strengths in mission-critical technology, network

technology and superior quality. Key products in this endeavor

will be our PRIMEQUEST mission-critical IA servers,

which offer mainframe-class performance and reliability on

an open-standard platform, and our unified product line of

PRIMEPOWER UNIX servers offered in conjunction with

partner Sun Microsystems, Inc. Strengthening sales of these

system products overseas will be a key theme. We plan to do

this by working closely with our Group companies in North

America and Europe and by leveraging our strategic alliance

with EDS.

In Network Products, we will pursue opportunities in

fields that require leading-edge technologies. To break into

new businesses we will focus particular attention on optical

access networks, which are becoming increasingly common,

and actively respond to opportunities in WiMAX and other

broadband wireless access fields.

Network ProductsThe jointly developed Fujitsu and Cisco CRS-1 high-end routing system for communications carriers(left) and our FLASHWAVE optical transmissionsystem (right) are being used to build broadbandinternet and other next-generation communicationsnetworks.

Platform Solution Center (Shanghai, China)A one-stop support site providing everything from systemconsulting to verification and performance testing usingactual equipment.

22 Fujitsu Limited

■ Business OverviewThe Technology Solutions business segment comprises

products and services primarily for corporate and govern-

ment customers and, within this, the Services sub-segment

includes systems integration, outsourcing and other services.

The Services sub-segment is further divided into three cat-

egories: Solutions/SI, centered on systems integration;

Infrastructure Services, which encompasses outsourcing ser-

vices, network services and system support services; and

Others, which includes the installation of ATMs, contactless

palm vein pattern authentication systems and IT systems.

■ Operating Environment and PerformanceIn fiscal 2005, the global IT market continued to expand on

strong corporate IT investment. In Japan, the IT market

gradually recovered overall, although there were differences

between industry sectors—IT investment picked up among

forward-looking companies in the manufacturing and retail

industries, as well as certain areas in the financial services and

telecommunications fields.

Under these conditions, Services posted sales of ¥2,266.2

billion (US$19,206 million), up 3.0% from the previous year,

or an increase of 2.7% excluding the impact of change in

accounting policies. The major factors supporting this growth

were brisk demand for outsourcing services in the UK and

sharply higher sales driven by business expansion in North

America. This more than compensated for sluggish IT invest-

ment in Japan and a fallback in special demand generated by

the redesign of Japanese banknotes in fiscal 2004. Operating

income rose ¥41.0 billion to ¥137.9 billion (US$1,169 million),

mainly reflecting a substantial decline in losses related to loss-

generating projects, growth in outsourcing services in the UK,

and change in accounting policies.

1,002 976

1,020 1,037

221

208

232

2,199

2,200

2,266

1,029 938

Solutions/SIInfrastructure ServicesOthers

2004

2005

2006

■ Sub-segment Sales* by Main Product

Bedside Medical TerminalsThese terminals, attached to patient beds, display electronicpatient chart data to help doctors and nurses provide medi-cal care. They also improve the quality of patient care bydisplaying information and messages from the hospital.

Technology Solutions—Services

(Billions of Yen)



■ InitiativesIn Solutions/SI, we reduced the number of loss-generating

projects to a normal level. This was the result of ongoing

efforts by a dedicated unit formed to strengthen assurance and

business support systems, realignment of sales and system

engineering groups into integrated units along customer lines,

and improvements to the project management framework.

Additionally, aiming to drive full-scale expansion overseas,

consolidated subsidiary Fujitsu Consulting acquired

Rapidigm, Inc., an IT consulting firm based in the US with

around 2,000 consultants in North America and India. This

move has given us an even stronger business base in the North

American market.

In Infrastructure Services, Fujitsu Services of the UK,

building on its successes of fiscal 2004, captured new large-

scale IT outsourcing projects to support further business

growth. New deals included a central government business

process outsourcing (BPO) contract with Northern Ireland’s

Department of Finance and Personnel.

■ Issues to Be AddressedIn our services business in Japan, we will focus on enhancing

our earnings capabilities by deploying our System Develop-

ment Architecture & Support (SDAS) and other tools to

boost systems development efficiency, and working to further

reduce the number of loss-generating projects. We will also

aggressively pursue business growth in six fields positioned as

key for the future: infrastructure optimization, IT operational

improvement, security, internal control and the environment,

utilization of integrated enterprise resource planning (ERP),

and ubiquitous networking.

Based on our belief that overseas expansion will drive

growth, we also intend to aggressively pursue expansion

centered on North American operations and European

outsourcing services.

UBWALL Interactive DisplaysInstalled in shopping malls or other sites that attract large numbers of people,UBWALL displays information tailored to individual consumer interests. Whenusers hold up IC card-enabled mobile phones to the screen, the display showsrecommended restaurants, products and store locations.

Food Product TraceabilityFitting electronic tags to individual food products enables man-agement of traceability data (product origin, distribution his-tory) so that customers can check the origin of products andother information, helping them to purchase safe produce withgreater confidence.

24 Fujitsu Limited

■ Business OverviewThe Ubiquitous Product Solutions business segment com-

prises mainly products sold in high volumes, such as personal

computers (PCs), mobile phones and hard disk drives (HDDs).

■ Operating Environment and PerformanceIn fiscal 2005, the global PC market grew, paced by overseas

demand for notebook PCs. In HDDs, the markets for 3.5-

inch drives for servers and 2.5-inch drives for notebook PCs

also expanded. The 2.5-inch HDD market saw particularly

strong growth thanks to healthy demand for notebook PCs

and the emergence of new markets in the digital consumer

electronics field.

In this business climate, the Ubiquitous Product Solutions

segment posted an increase in sales of 2.8% over the previous

fiscal year to ¥1,059.9 billion (US$8,982 million). The main

reason for this rise was robust HDD sales, which grew more

than 20% compared to a year earlier. Although PC sales were

higher overseas, competition in Japan intensified, resulting in

a decline in PC sales overall. In mobile phones, universal design

handsets proved popular with consumers.

Operating income rose ¥3.1 billion to ¥34.4 billion (US$292

million). Increased component procurement costs due to the

weaker yen were more than offset by cost reductions and sav-

ings from quality improvements yielded by manufacturing

innovation initiatives, as well as higher earnings in HDDs.

■ InitiativesDuring fiscal 2005, we worked to reduce costs and raise qual-

ity through company-wide manufacturing innovation initia-

tives. Specific steps included improving coordination among

production sites, increasing use of automated testing to boost

quality, and further extending the implementation of Toyota

Production System reforms to drive down total operation costs.

In PCs, we leveraged our technological advantages to cre-

ate more distinctive products with upgraded security functions

and enhanced audio-visual capabilities, striving to develop and

launch these differentiated products in a timelier manner. In

776 235

756 285

19

17

18

948

1,031

1,059

740 190

PCs/Mobile PhonesHard Disk DrivesOthers

2004

2005

2006

■ Segment Sales* by Main Product

Ubiquitous Product Solutions

FMV-DESKPOWER TX Series of PCsTX series PCs come with 37-inch full-spec, wide-screenLCD screens that allow users to enjoy impressive high-definition video in their own living rooms. At the heart ofthe TX series is a hybrid Dixel filter that faithfully repro-duces vivid high-definition pictures.

(Billions of Yen)



mobile phones, we focused on developing original products

and moving to standardized platforms, aiming to achieve a

more stable operating base. Finally, in HDDs, we realized

higher levels of quality by bringing the production of elemen-

tal technologies and core components in house. This helped

us to capture the number two ranking worldwide in both 3.5-

inch HDDs for servers and 2.5-inch HDDs for notebook PCs.

■ Issues to Be AddressedIn our domestic PC business, we will place emphasis on deliv-

ering high-value-added products that are compatible with ter-

restrial digital broadcasting and have larger screens and

enhanced security features. Overseas, where continued growth

is expected, we plan to expand our business focusing on note-

book PCs. In mobile phones, although significant growth in

unit sales cannot be expected due to the already high diffu-

sion rate in Japan, we will continue to develop original prod-

ucts, primarily universal design handsets, while also pursuing

development alliances and further enhancing manufacturing

reforms in a determined effort to boost earnings. In HDDs,

we will upgrade and expand our product lineup, with a par-

ticular focus on 2.5-inch HDDs for notebook PCs and digital

consumer electronics, both markets where rapid growth is

forecast. In addition, we will enter the promising growth

market for 1.8-inch HDDs used in mobile device applications,

developing the products in partnership with Cornice Inc. In

addition to promoting vertical integration by manufacturing

elemental technologies and core components in house, we will

forge a hybrid business model through strategic alliances. This,

together with the development and manufacturing of prod-

ucts that incorporate sophisticated perpendicular magnetic

recording technology, will underpin our efforts to build a more

powerful HDD business.

FOMA® F902iS Mobile PhoneThe FOMA® F902iS mobile phone is a full-fledged music player that allows usersto download and listen to WMA music files from the internet. The phone alsoincorporates a fingerprint sensor for added security.

Hard Disk DrivesOur hard disk drives are used in PCs, servers and storagesystems. Fujitsu was the first company in the world todevelop and launch a 200GB 2.5-inch HDD compatiblewith serial ATA interfaces.

26 Fujitsu Limited

■ Business OverviewThe Device Solutions business segment is comprised of two

sub-segments: LSI Devices, centered on logic LSI devices and

including system memory products; and Electronic Compo-

nents, Others, including semiconductor packages, SAW

devices and a range of other electronic components.

■ Operating Environment and PerformanceIn the first quarter of fiscal 2005, the logic LSI device market

experienced a downturn as manufacturers, particularly in the

digital consumer electronics and mobile phone sectors, con-

tinued to reduce inventories. From July onwards, however,

demand expanded, centered on digital AV products, mobile

phones and automotive applications. Prices for logic LSI

devices continued to decline during the year, in parallel with

falling prices for finished digital AV products and mobile

phones. There was a similar picture in the system memory

products market, with shipments increasing, primarily for

digital AV and mobile phone applications, but prices continu-

ing to decline.

In this business climate, Device Solutions posted sales of

¥707.5 billion (US$5,996 million), down 11.0% compared to

a year earlier. However, excluding the impact of the transfer

of our flat panel display businesses, sales on a continuing

operations basis increased by 0.5%. In LSI Devices, sales of

system memory products decreased due to declining market

prices, but the market for logic LSI devices recovered in the

latter half of the fiscal year, especially for devices used in mobile

phones and digital AV products. The start of volume produc-

tion of advanced logic LSI devices also contributed to sales.

The combination of these factors supported a slight overall

rise in sales of LSI devices, mostly from overseas sales, com-

pared to fiscal 2004.

Operating income totaled ¥33.3 billion (US$282 million),

an increase of ¥0.7 billion compared to the previous fiscal year.

Although operating income in the LSI Devices sub-segment

declined due to a weaker market during the first half of the

fiscal year, as well as the impact of expenses relating to the

start-up of the 300mm wafer facility at our Mie Plant, the Elec-

tronic Components, Others sub-segment continued to post

strong results, and losses associated with the flat panel dis-

247

468 326

460

376

707

794

804427

LSI DevicesElectronic Components, Others

2004

2005

2006

■ Segment Sales* by Main Product Mie Plant for Advanced Logic LSI ProductionOnstream since April 2005, the Mie Plant produces logic LSI devices on 300mm wafers.The plant will boast world-class production capacity in advanced logic LSI devices when asecond fab scheduled for construction at the site becomes operational.

2006/3(Actual)

2006/9 (Plan)

2007/3 (Plan)

2007/9 (Plan)

2008/3 (Plan)

4

8

15

20

25

■ Increasing 300mm WaferProduction Capacity(90nm/65nm process technology)(thousands of wafers per month)

Device Solutions

(Billions of Yen)



play businesses were eliminated. These factors supported the

slight increase in operating income compared to fiscal 2004.

■ InitiativesAt the end of the previous fiscal year, we transferred our PDP

business to Hitachi, Ltd. Then, early in fiscal 2004, we trans-

ferred our LCD operations to Sharp Corporation. These

moves were taken to shift resources into the logic LSI busi-

ness. In conjunction with this strategy, we plan to drive a sig-

nificant increase in sales by focusing on advanced 90nm

technology and beyond as future growth drivers. As part of

this approach to grow our semiconductor operations by

adopting cutting-edge technologies, we brought a new 300mm

wafer semiconductor fabrication facility at our Mie Plant (Fab

No. 1) onstream in April 2005. This facility, which can uti-

lize 90/65nm process technology for logic LSI devices, began

volume production in September 2005. Subsequently, in Janu-

ary 2006, we made the decision to construct a second 300mm-

facility (Fab No. 2) at the same plant. When operational, this

facility will give us world-leading levels of output for advanced

logic devices.

■ Issues to Be AddressedIn the LSI field, we will continue to channel resources into

our logic LSI business. Along with fully leveraging our

300mm wafer capacity at Mie and expanding our lineup of

cutting-edge growth-driver products, we will further

strengthen our standard product offerings. Pursuing a bal-

anced LSI business in this way will help us to enhance our

overall earnings capabilities.

Additionally, by utilizing our strengths in the imaging,

wireless, security and other fields, we will roll out ASSPs*1

in global markets, and reinforce our New IDM business

model, which balances COT*2 and SoC*3 approaches. This

strategy will underpin efforts to boost profitability and

enhance our market presence.

*1 Application-specific standard products: Standardized LSI products designed forpower supply, file management, image processing and HDTV applications inPCs, mobile devices, communications networks and other products. They canbe sold to multiple users.

*2 Customer-owned tooling: The manufacture of LSI devices (masks, wafers, etc.)based on design and development carried out by the user.

*3 System on a chip: The integration of microprocessors, chipsets, video chips,memory and other functions on a single chip.

Large-diameter 300mm WafersCorporate Senior Executive Vice President ToshihikoOno holds one of the Mie Plant’s 300mm wafers,which employs 90nm process technology, at anelectronic device strategy briefing in February 2006.

MB88387 LSI Devices Compatible with IDB-1394In-Vehicle Network StandardOur electronic devices enable the rapid transmission of digitalcontent inside vehicles, heralding the development of carswhere passengers can enjoy high-definition DVDs and otherdigital content on seat-back screens.

Rear display(DVD video)

Rear display(Digital TV)

IDB-1394

Front display

MB88387

28 Fujitsu Limited

� Research & Development

■ Foster the creation of new businesses■ Create and accumulate advanced technologies■ Extend our value chain globally■ Fulfill our social responsibilities

■ Organic storage technologyWe have developed organic storage technology that utilizesautonomic clusters of hard disk drives to enable large volumesof data to be securely stored and quickly retrieved whenneeded. The hard disk drives can be hot-swapped with new-generation drives without service interruption, thereby main-taining high levels of reliability and performance. Using thistechnology, we launched the world’s first organic storage ser-vice as an outsourcing arrangement. This service enablessuperior information management in terms of both securityand cost performance in response to customers’ actual utili-zation needs, including for documents that are compliant withJapan’s e-Document Law and electronic medical records.

■ High image quality processing technology for PCs andmobile phonesDeveloped jointly with the NHK Science & TechnicalResearch Laboratories, our encoder technology enables high-quality broadcast services even at low bit rates of around 100kilobits per second that are suitable for mobile phones andother mobile devices. Compliant with the latest videoencoding format, AVC/H.264, this technology, which wehope to develop into the de facto industry standard, is alsobecoming increasingly important in enabling the high-speedencoding of data-heavy video for large-screen TVs.

Our Dixel filter makes possible high-resolution, high-quality images on PCs equipped with TV tuners. We havealso developed a secure chip that employs original encryp-tion technology to safeguard against the hacking of digitalbroadcast content, thereby allowing broadcasts of Hi-Vision

Major Achievements in Fiscal 2005

240

241

5.0

5.0

4.9 255

2005

2006

2007 (plan)

R&D expenditure (Billions of Yen)Ratio to net sales (%)

■ R&D Expenditure ■ Fiscal 2005 R&D Expenditure by Segment

Our Mission in R&DAiming to contribute to Fujitsu’s technology value chain, wecarry out cutting-edge research and development in fieldsranging from IT services to computing and telecommunica-tions systems, as well as in supporting fields such as electronicdevices and materials technology.

quality sound and images to PCs while ensuring propercopyright protection. These technologies are now incorpo-rated in our products.

■ CMOS multilayer wiring technology for 45nm-generationdevicesFujitsu has been a pioneer in 90nm and 65nm process tech-nologies, which deliver faster processing speeds and reducedpower consumption in advanced LSI devices used in variousfields, including servers, digital AV equipment, and mobilephones. With the increasing miniaturization of LSI devices,wiring intervals are projected to become even narrower inthe years ahead, meaning the use of conventional high-conductivity insulating film would result in diminished chipoperating speeds. To resolve this problem, we have developedmultilayer wiring technology using copper and a low-k, high-strength polysilica-type nano-clustering silica (NCS) insulat-ing material developed in-house. The technology will enableus to achieve high processing speed and low power consump-tion in 45nm-generation chips.

54.5%

13.4%

15.8%

16.4%

Total¥241billion

Technology Solutions

Ubiquitous ProductSolutions

DeviceSolutions

OtherOperations

Electron microscope cross-sectional image ofcopper/NCS multilayer wiring

Substrata fine wiring section

NCSCu

250nm

Transistor section



Strategic Direction in Fiscal 2006

■ Strides toward practical application of quantum dotlasers—a key optical transmission technologyWe have teamed up with Mitsui & Co., Ltd. to establish QDLaser, Inc. (QDL), an optical device venture focusing on the prac-tical application of quantum dot* laser technology. The quan-tum dot laser is an epoch-making laser that outstrips conventionalsemiconductor lasers in terms of temperature-independentoperation, low power consumption, long-distance transmission,and high speed. As such, it is seen as a core enabling technologyfor high-performance light sources in the field of optical telecom-munications, where data traffic is growing dramatically. Throughgrowth in QDL’s operations, we plan to advance the practicalapplication of world-class quantum dot laser technology. This willsupport efforts to enhance our competitive position in themedium- and long-haul optical transmission equipment market,where we are already among the market leaders in Japan and theUS, as well as the optical access market, which is projected toexpand globally.* Quantum dots are semiconductor particles measuring a single nanometer (one bil-

lionth of a meter) in size, which were developed through cooperation between FujitsuLimited, Fujitsu Laboratories and the University of Tokyo’s Arakawa Laboratory.

■ Develop new solutions leveraging our technology valuechainWe will advance R&D efforts to create high-value-addedsolutions that leverage and combine our wide array of cutting-edge technologies in IT services, computers, networks, elec-tronic devices and other areas.

■ Key research themes in fiscal 2006• Upstream software & services technologies• Next-generation computing platforms

Next-generation TRIOLE (automation/virtualization/integration)

• Next-generation networks (NGN)Convergent fixed-mobile network technologies

• High-density perpendicular magnetic recording tech-nology

• Verification of CMOS technology for 45nm-generationdevices

■ R&D in emerging new fields to support future businessesWe are focusing on R&D in emerging new fields to supportfuture businesses, including:

• Peta-scale computing (next-generation supercomputer)• Next-generation mobile communications technology• Nanotechnology• Intelligent Transport System (ITS) technology to

improve safety and security• Humanoid robots with artificial intelligence• IT that supports lifestyles in an aging society

■ Promoting joint research to identify new possibilities intechnology and productsWe will aggressively pursue joint research with universities,research institutes and corporations worldwide.

Optical transmissionmodule

Quantum dot lasersub-assembly

Optical signal

50 nm

Cross-sectionalimage

Surfaceimage

100 nm

p+-GaAs

p-AlGaAsn-AlGaAs

n-GaAs

Electrode

Opticalsignal

Electrical signal

200 µm

Laser chip

Sub-assembly and module

30 Fujitsu Limited

The Importance of Intellectual PropertyProtecting intellectual property rights is clearly articulated in the Code of Conduct of The FUJITSU Way, the core set of principlesguiding the corporate and individual actions of the Fujitsu Group. Consequently, all our employees recognize intellectual propertyas a key corporate asset supporting our business activities. Highly aware of the legal implications related to intellectual propertyrights, we strive to acquire, protect, and utilize such rights, taking steps to safeguard our own rights, while respecting the intellec-tual property of other companies. Specifically, we:

■ Implement strict data protection measures, including initiatives to prevent unintended leaks■ Create a culture that values and protects intangible assets (intellectual property)■ Take an uncompromising stance on infringement of intellectual property rights

Intellectual Property StrategyWe are pursuing the following five specific measures to promote anintellectual property strategy closely integrated with our businessoperations and R&D activities.

1) Secure, maintain, manage and utilize strategic rights (industrial prop-erty rights, patents, trade secrets, etc.)

2) Respect intellectual property rights (avoid infringing on other com-panies’ patents)

3) Rigorously manage information (enhance internal rules, conducttraining and implement periodic checks)

4) Participate in external activities related to public policy making (i.e.,Japan Federation of Economic Organizations (Keidanren), JapanElectronics and Information Technology Industries Association andother bodies)

5) Educate and train strategic personnel

� Intellectual Property

Three-in-one Approach

Business strategy R&D strategy

Intellectual property strategy

■ Patent Applications in Japan in 2005 ■ Patent Applications in the US in 2005

1 Matsushita Electric Industrial Co., Ltd. 3,913

2 Toshiba Corporation 2,874

3 Canon Inc. 2,389

4 Seiko Epson Corporation 2,236

5 Hitachi, Ltd. 2,084

6 Mitsubishi Electric Corporation 1,938

7 Nissan Motor Co., Ltd. 1,906

8 Sharp Corporation 1,784

9 Sony Corporation 1,694

10 Ricoh Company, Ltd. 1,674

11 SANYO Electric Co., Ltd. 1,544

12 Fujitsu Limited 1,511

13 Honda Motor Co., Ltd. 1,463

14 DENSO Corporation 1,418

15 Toyota Motor Corporation 1,411

16 Matsushita Electric Works, Ltd. 1,197

17 NTT Corporation 1,146

18 Mitsubishi Heavy Industries, Ltd. 1,060

19 NEC Corporation 991

20 Fuji Photo Film Co., Ltd. 934

1 IBM Corporation 2,972

2 Canon Inc. 1,837

3 Hewlett-Packard Development Company, L.P. 1,801

4 Matsushita Electric Industrial Co., Ltd. 1,720

5 Samsung Electronics Co., Ltd. 1,645

6 Micron Technology, Inc. 1,561

7 Intel Corporation 1,551

8 Hitachi, Ltd. 1,293

9 Toshiba Corporation 1,288

10 Fujitsu Limited 1,168

11 Sony Corporation 1,149

12 General Electric Company 906

13 Seiko Epson Corporation 888

14 Infineon Technologies AG 804

15 Koninklijke Philips Electronics N.V. 767

16 Robert Bosch GmbH 758

17 Fuji Photo Film Co., Ltd. 755

18 Microsoft Corporation 746

19 Texas Instruments Incorporated 736

20 Honda Motor Co., Ltd. 730

■ Our Global Patent Portfolio

Source: Fujitsu survey based on Japan Patent Office data(Number of issued patents)

Source: IFI CLAIMS Patent Services (Number of issued patents)

0 5,000 10,000 15,000

2004

2005

2006

EuropeJapanAsiaNorth America

(Number of patents held)

■ Maintain Superior CompetitivenessActively secure and utilize intellectual property to moreeffectively differentiate our products and services.■ Ensure Business FlexibilityWork to develop a strong intellectual property portfolioto ensure and enhance business flexibility and obtainmore favorable terms in collaboration agreements withother companies.

■ Secure Business ProfitabilityUse specialist divisions to aggressively market our tech-nologies, including efforts to generate revenue fromlicensing fees.



(2) Key Themes Driving PatentAcquisition ActivitiesWe are striving to strengthen our patentportfolio guided by key themes in eachof our business areas. Using our patentdata search system (ATMS/IR.net),which we also provide to external cus-tomers as an ASP service, we are work-ing to strategically secure patents byclosely monitoring the latest technologytrends, creating patent maps and takingother steps.

(3) LicensingWe conclude cross-licensing agreements aimed at preserving a high degree of business latitude, and make technologies publiclyavailable in various forms where we believe this will foster broader use of our technology compared with commercializing it on ourown. We currently have more than 500 licensing agreements.

2. Respecting Other Companies’ RightsThe impact of infringing upon the rights of other companies goes beyond having to pay significant fees. In the worst case, it couldhave a major economic impact on our company due to the loss of business opportunities and other issues. In addition, it couldprevent us from providing products and services, thereby severely inconveniencing our customers. We are fostering a culture atFujitsu that respects the patent rights of other companies, as well as creating an environment that allows all our technicians toutilize the ATMS/IR.net system to research patents held by other companies.

3. Protecting the Fujitsu BrandWe work to protect and maintain the value of the Fujitsu name as a brand trusted by customers. As part of this effort, we haveestablished clear and uniform usage rules for all Group companies, and we have trademarked our name in more than 150 countriesworldwide to eliminate any obstacles to our global business expansion. In 2005, unauthorized use of the Fujitsu name was discov-ered in China. We are taking necessary measures to protect our brand and resolve this kind of issue.

For further details, please see “Fujitsu’s Intellectual Property Strategy” at: http://www.fujitsu.com/global/about/ir/topics/2006/

1. Patent Rights(1) Global Patent Portfolio and Promotion OrganizationCentered on Japan, and including not only Europe and the US but elsewhere in Asia, particularly China, South Korea and Taiwan,we are working to secure effective patents on a global basis. Outside Japan we are actively working to create new inventions at ourdevelopment bases in the US, Europe, China, and elsewhere, thereby strengthening our global patent portfolio.

Mission-critical Servers (PRIMEQUEST/PRIMEPOWER)We filed more than 600 domestic and interna-tional patents, primarily relating to the proces-sor and bus architecture.

Optical Transmission SystemsWe filed more than 250 domestic and inter-national patents relating to cutting-edgeWDM technology (all optical switching) andnext-generation ultra high-speed transmissiontechnology (40G).

Next-generation Networks (WiMAX, 3.5Gand others)We are consolidating our technologies in areasthat leverage our strengths, such as telecom-munications and semiconductors, and workingtoward standardization. We filed more than100 domestic and international patents.

Semiconductor Miniaturization Technology(45nm and beyond)Focusing on securing rights for technologiesthat increase speed and lower power consump-tion, as well as wiring and process technologies,we filed approximately 60 patents.

■ Principal Patent Results in Fiscal 2005■ Registered Patents by BusinessGroup (Fiscal 2005)

13%

33%

20%

29%

5%

Total84,000

Solutions

Products

ElectronicDevices

FujitsuLaboratories Ltd.

Other

PRIMEQUEST mission-critical IA server FLASHWAVE optical transmissionsystem

32 Fujitsu Limited

Seeking to coexist and prosper alongside local communities and global society as a good corporate citizen,

we use our unique position as an IT company to contribute to society in a variety of ways. Our goal is to

fulfill our responsibility to the sustainable development of society and generate benefits for all our stake-

holders, while at the same time realizing the growth of the Fujitsu Group. Below are just some of the

activities we were involved in during fiscal 2005.

■ Japan-America Institute of Management Science (JAIMS)Established by Fujitsu in 1972, JAIMS is a not-for-profit postgraduate educational institute whose mission

is to cultivate leaders who can fulfill their potential on the global stage. Over 20,000 people from more than

50 countries have already benefited from JAIMS courses. Thanks to the language abilities, business skills

and global contacts they acquired through their JAIMS education, many alumni are now actively contrib-

uting to the development of the global economy in countries worldwide.

■ Mathematical Olympiad Foundation of Japan and the Informatics Olympiad Japan CommitteeWe continue to support the activities of the Mathematical Olympiad Foundation of Japan and the

Informatics Olympiad Japan Committee, which seek to discover and foster young talent who can play a

key role in developing society in the future. The Mathematical Olympiad Foundation of Japan selects and

supports Japan’s representatives for the International Mathematical Olympiad, while the Informatics Olym-

piad Japan Committee works to promote education in mathematical information science, primarily by

selecting and sending Japanese representatives to the International Olympiad in Informatics (IOI), a com-

puter programming contest for junior and senior high school students.

■ Reforestation activities overseasSince 1997, the Fujitsu Group has carried out reforestation activities that have encompassed the planting

of 1 million trees across 500 hectares in Thailand, Vietnam and Malaysia. One hallmark of this project is

the role of employees, who provide donations and travel as volunteers to target sites to participate in the

reforestation work. In November 2005, for example, volunteers helped plant dipterocarp trees at the Fujitsu

Group Malaysia Eco-Forest Park in the state of Sabah. We plan to continue activities at the same site in 2006.

Students at the Japan-America Institute of ManagementScience (JAIMS)

� Social and Environmental Activities

Giving Back to the Community

Japan’s representatives at the International MathematicalOlympiad

Overseas tree-planting activities


CO2 emissions were cut by around 15% at the Aizu-Wakamatsu Plant in fiscal 2005

The world’s first notebook PC with the mainhousing made from environmentally friendlybio-based plastic

Fujitsu obtained worldwide integrated ISO 14001certification

The Fujitsu Group recognizes that environmental protection is a vitally important business issue. By uti-

lizing our technological expertise in the IT industry and our creative talents, we seek to contribute to the

promotion of sustainable development. In addition, while observing all environmental regulations in our

business operations, we are actively pursuing environmental protection activities on our own initiative.

Through our individual and collective actions, we will continuously strive to safeguard a rich natural envi-

ronment for future generations. Below are just some of the steps we took to help protect the environment

in fiscal 2005.

■ Global warming countermeasures (reducing greenhouse gas emissions)We have established and are steadily working to achieve fiscal 2010 targets for the reduction of greenhouse

gas emissions generated by the business activities of the Fujitsu Group. We are also taking steps to cut CO2

emissions in product distribution operations through the promotion of modal shift and other measures.

Moreover, through the development of environmentally friendly products based on our Super Green Prod-

uct criteria, and the provision of Green Solutions comprising software and IT services that effectively help

to reduce environmental load, we are also helping customers to save energy and reduce emissions of green-

house gases.

■ Expanding the lineup of environmentally friendly productsIn January 2005, we launched the world’s first notebook PC with the main housing made from environ-

mentally friendly bio-based plastic. In fiscal 2005, we built on this success by extending the use of bio-based

plastic to other products, including point-of-sale (POS) terminals, automated teller machines (ATMs),

contactless palm vein authentication systems, image scanners and other products.

■ Worldwide integrated ISO 14001 certificationEnvironmental regulations for products are becoming increasingly strict in Europe and other regions world-

wide. In response to this trend, and due to the international nature of our business, we have built a global

environmental management system (EMS) to provide a common framework for the entire Fujitsu Group.

In the year under review, the Fujitsu Group received worldwide integrated ISO 14001 certification for this

system, which is among the largest of any major Japanese electronics company.

Environmental Activities

34 Fujitsu Limited

■ Corporate First SeniorVice Presidents

Hideaki YumibaTakashi IgarashiHaruki OkadaYoshiyuki TanakuraHiromichi Hirata

■ Corporate Senior VicePresidents

Ichiro KomuraTetsuo UranoKoichi HironishiKimihisa ItoKuniaki NozoeKazuhiko KatoKyung-soo AhnShigeru FujiiTakumi NakamuraJunichi MurashimaKazuo IshidaTerumi ChikamaTakashi Harima

■ Corporate Vice Presidents

Takashi AokiMakoto MatsubaraYoshifumi MitaFujio OharaAkira YamanakaTsuneaki OharaMasanobu KatohKazuo MiyataJirou SugawaraKiyonobu IshidaMasami YamamotoTatsuo TomitaToshio MorohoshiKoichi IshizakaHirokazu Uejima

Statutory Auditors Corporate Executive Officers

■ Standing Auditors

Takashi TakayaHirohisa Yabuuchi

■ Auditors

Yoshiharu Inaba(President and CEO, Fanuc Ltd.)

Tamiki Ishihara(Chairman, Seiwa Sogo TatemonoCo., Ltd.)

Megumi Yamamuro(Professor, University of TokyoGraduate Schools for Law andPolitics)

Takashi MoriyaSeiji NakagawaToshiyuki KuwaharaAkira FurukawaKenji IkegaiMakoto MurakamiHaruyoshi YagiMasatoshi KambeTsuneo KawatsumaMasaaki HamabaHaruyuki IidaKazuhiko HanaokaSusumu IshikawaMasami Fujita

� Management

Board of Directors■ Representative Directors

■ Directors

Hiroaki Kurokawa*President

Naoyuki AkikusaChairman

Masamichi Ogura*Corporate Senior Executive VicePresident

Toshihiko Ono*Corporate Senior Executive VicePresident

Chiaki Ito*Corporate Senior Executive VicePresident

Michiyoshi Mazuka*Corporate Senior Executive VicePresident

Kunihiko SawaAdvisorFuji Electric Holdings Co., Ltd.

Hiroshi OuraDirector and Senior Executive AdvisorAdvantest Corporation

Ikujiro NonakaProfessor EmeritusHitotsubashi University

Akira TakashimaVice Chairman

* Concurrently serve as corporate executive officers


� Corporate Governance

1. Basic Stance on Corporate Governance

We believe that pursuing management efficiency while effectivelymanaging business risks is essential to achieving sustainableimprovement in corporate value. Recognizing that stronger cor-porate governance is vital to realizing this goal, we have been activein appointing outside directors to help ensure sound and transpar-ent management. At the same time, by separating managementoversight and operational execution functions, we have promotedfaster decision-making while further clarifying managementresponsibilities. The clear separation of these functions is designedto further improve management transparency and efficiency.

We manage our Group companies based on clear distinctionbetween 1) companies that perform an assigned function in ourbusiness; and 2) companies that pursue a synergistic relationshipwith us based on a shared corporate strategy.

2. Status of Corporate Governance-related PolicyImplementation

(I) Management Control Organization with Respect to Busi-ness Decisions, Operational Execution and Oversight,and Other Corporate Governance Structures

(i) Institutional Structure and Internal ControlThe Board of Directors is responsible for management oversight,supervising the operational execution functions of two executiveorgans under its authority, the Management Strategy Counciland the Management Council.

The Management Strategy Council discusses and decidesupon fundamental policies and strategy regarding business man-agement. The Management Council makes decisions on impor-tant matters regarding operational execution. Issues discussed bythe two councils and a summary of their discussions are reportedto the Board of Directors, which makes decisions on items ofparticular importance. The Management Strategy Council gen-erally meets once a month, while the Management Council gen-erally meets three times a month, but meetings for either bodycan be convened whenever necessary.

The auditing function is carried out by statutory auditors(Board of Statutory Auditors), who review the Board of Directorsas well as operational execution functions, and attend importantmeetings, including meetings of the Board of Directors as well asthe Management Strategy Council and Management Council.

In addition, the 10-member Board of Directors consists ofeight internal directors and two outside directors, while the five-member Board of Statutory Auditors consists of two internalauditors and three external auditors. To further clarify the man-agement responsibility of directors, the term of directors wasreduced from two years to one year under a resolution adoptedat the Annual Shareholders’ Meeting convened on June 23, 2006.

(ii) Basic Stance on Internal Control Framework and Statusof Implementation

At a meeting of the Board of Directors on May 25, 2006, the fol-lowing basic stance was adopted with respect to enhancement ofthe Company’s internal control system based on Article 362,Paragraph 5 and Paragraph 4, Section 6 of the Company Law, aswell as Article 100, Paragraphs 1 and 3 of the Company LawEnforcement Regulations.

1. ObjectiveThe FUJITSU Way, the core set of principles guiding the FujitsuGroup, sets forth our goal of helping to solve customers’ prob-lems and contributing to society through the provision of high-quality products and services based on leading-edge technology,as well as our determination to fulfill our corporate responsibili-ties to stakeholders, including: customers, employees*, sharehold-ers and investors, suppliers, business partners, local communitiesand broader global society.

We believe that the concurrent pursuit of efficient manage-ment and the proper control of business risks are essential toachieving sustainable improvement in the corporate value of theFujitsu Group. Recognizing that stronger corporate governanceis vital to realizing this goal, we are constantly working to imple-ment and advance the policies outlined below.

2. Framework to Ensure the Propriety of Fujitsu Limitedand Fujitsu Group Business Activities

(1) System to Ensure Efficient Execution of Duties by theBoard of Directors

q Management oversight functions and operational executionfunctions are separated at Fujitsu. The Board of Directorssupervises the Management Strategy Council, ManagementCouncil and other executive organs charged with opera-tional execution functions. Among these executive organs,the Management Strategy Council discusses and makesdecisions on fundamental matters of business direction andstrategy. The Management Council makes decisions aboutimportant matters relating to operational execution. Issuesdiscussed by the two councils and a summary of their dis-cussions are reported to the Board of Directors, whichmakes decisions on matters of particular importance.

w In order to strengthen management oversight functions, weactively appoint outside directors and auditors.

e The Board of Directors clarifies matters relating to theduties of directors with assigned business responsibilities,corporate executive officers, and other executive-level man-agers (all referred to hereafter as “senior managers”), as wellas the authority of other executive bodies, and sees to it thatduties are executed in accordance with the responsibilitiesof each position.

r Senior managers shall make decisions regarding execution oftheir duties based on appropriate decision-making proceduresin accordance with “Board of Directors Regulations,”

36 Fujitsu Limited

“Management Strategy Council Regulations,” “Manage-ment Council Regulations,” “Ringi Regulations,” and otherrelevant regulations.

t Senior managers are expected to thoroughly familiarizeemployees with management direction and other strategydirectives, and, in order to achieve business goals, to set andachieve concrete objectives.

y In order to pursue greater operational efficiency, senior man-agers are expected to continuously promote the developmentand full implementation of internal control systems as wellas the improvement of business processes.

u The Board of Directors monitors and directs progress in theachievement of business objectives by arranging for monthlyreports on financial results and business operations fromsenior managers and other executive organizations with busi-ness execution duties.

(2) System to Ensure that Execution of Duties by Directorsand Employees Complies with Laws, Regulations and theArticles of Incorporation

q Senior managers are expected not only to uphold TheFUJITSU Way, which includes the basic principles of com-pliance with laws, regulations and the Articles of Incorpora-tion, but to also actively promote compliance by the FujitsuGroup as a whole in accordance with their ethical obligationsas senior managers.

w Senior managers shall, by carrying out ongoing educationalprograms and other measures, strive to ensure thatemployees rigorously adhere to the basic principles of TheFUJITSU Way, and thereby promote compliance by theFujitsu Group as a whole.

e Senior managers shall clarify legal regulations and other rulesregarding the business activities of the Fujitsu Group, as wellas institute and enforce the necessary rules, training, andmonitoring systems to promote compliance by the FujitsuGroup as a whole.

r In the event that senior managers or employees become awareof the possibility of a serious operations-related complianceviolation, they are to immediately inform the Board of Direc-tors and/or the Board of Statutory Auditors through regularoperational reporting lines.

t In order to enable the early discovery of potential complianceproblems and their proper handling through informationchannels separate from regular operational reporting lines,senior managers shall establish and maintain an internalnotification system that includes a structure and proceduresfor protecting those who raise compliance issues.

y The Board of Directors shall receive on a periodic basis reportson the state of operations from those charged with executingthem as well as confirm that there are no compliance viola-tions in connection with execution of business duties.

(3) Regulations and Other Structures for Managing the Riskof Losses

q Senior managers strive to realize the continuity of Groupbusinesses, growth in corporate value and the sustainabledevelopment of corporate activities. In order to deal with risksthat might constitute obstacles to achieving these goals, theyshall establish jurisdictions for various types of risks and putin place administrative systems to deal with them in anappropriate manner.

w Senior managers shall regularly assess and verify risks thatmight result in losses to the Group and report significantissues to the Board of Directors.

e In regard to the kind of risks identified in the preceding item,as well as other risks that might be envisioned to arise in thecourse of carrying out business activities, senior managers shallestablish preventative and other measures to control risks andcarry out activities to minimize possible losses. In addition, inorder to minimize losses resulting from the elicitation of inci-dences of risk, along with establishing a Risk ManagementCommittee and implementing other necessary measures, inci-dences of risk shall be analyzed on a periodic basis and reportedto the Board of Directors, and other activities shall be carriedout to prevent similar risks from arising.

r In order to gather the kind of risk information that cannotbe captured through the measures referred to above, seniormanagers shall put in place and maintain an internal notifica-tion system that includes protection for those who come for-ward with information.

(4) Systems for Retaining and Managing InformationRelating to Execution of Directors’ Duties

q Based on company policies, senior managers shall delegatepersons with the responsibility for retaining and managingthe following documents (including in digital form) andother important information relating to the execution ofdirectors’ duties:• Minutes of Annual Shareholders’ meetings and related

materials• Minutes of Board of Directors’ meetings and related

materials• Minutes of other meetings involving important decision-

making bodies along with related materials• Documents and related materials authorized by senior

managers• Other important documents relating to management

execution by senior managersw In order for directors or statutory auditors to verify the sta-

tus of issues relating to operational execution of duties, theyshall have access as needed to the documents listed in theprevious item, and the persons responsible for retaining andmanaging these documents shall put systems in place toensure that directors and statutory auditors can have accessto them when they are requested.


(5) Systems for Ensuring the Propriety of Fujitsu GroupBusiness Activities

q In order to continuously improve the corporate value of theFujitsu Group, the Company shall, in accordance with TheFUJITSU Way, provide guidance and support to FujitsuGroup company senior managers to ensure that proper sys-tems are in place throughout the Group to efficiently andproperly adhere to points (1)–(4).

w Specifically, in regard to the issues mentioned in the previ-ous item, we shall prepare a set of Fujitsu Group Manage-ment Regulations that specify each company’s role,responsibilities, lines of authority, decision-making proce-dures, and other matters.

e Senior managers from Fujitsu Limited and Fujitsu Groupcompanies shall meet regularly for updates on the Group’smanagement direction and to address issues relating to achiev-ing business performance targets. In addition, the statutoryauditors of Fujitsu Group companies shall meet to addressissues facing the Fujitsu Group from an audit perspective.

r Senior managers from Fujitsu Limited and each Group com-pany shall formulate policies to resolve any obstacles relatingto meeting business performance targets identified in the pre-vious item, and implement appropriate policies after a thor-ough discussion of the issues. If necessary, Fujitsu Limited shallreceive reports or applications for approval as shall be specifiedseparately in the Fujitsu Group Management Regulations.

t The Company’s internal audit division shall coordinate witheach Group company’s internal audit division to performinternal audits of the entire Fujitsu Group. Findings shall beregularly reported to the boards of directors and/or statutoryauditors of Fujitsu Limited and the Group company concerned.Important matters relating to Fujitsu Group companiesare reported to Fujitsu’s Board of Directors and Board ofStatutory Auditors.

(6) Systems for Ensuring the Propriety of Audits byStatutory Auditors

<Provisions to Ensure Independence>q The Company shall staff the Statutory Auditors’ Office with

employees to help the statutory auditors perform their duties.Employees selected for this purpose shall have the capabili-ties and knowledge needed to meet the requirements of thestatutory auditors.

w To ensure the independence of the employees assigned to theStatutory Auditors’ Office, senior managers shall consult inadvance with the statutory auditors regarding personnelissues for these employees, including appointments, transfers,and compensation.

e As a general principle, senior managers shall not haveemployees assigned to the Statutory Auditors’ Office assumeconcurrent responsibilities with other units. If, however, thestatutory auditors request the assistance of employees withspecialized expertise, necessitating concurrent responsibili-ties for those employees, the provisions in the preceding itemensuring independence shall apply to those employees.

<Provisions for Reporting>q Senior managers from Fujitsu Limited and each Group com-

pany shall provide opportunities for statutory auditors toattend important meetings.

w Senior managers and employees from Fujitsu Limited andeach Group company shall immediately notify the statutoryauditors of any incidences of risk that impact managementor financial performance, or if they become aware of evi-dence of major compliance violations relating to the con-duct of business activities.

e Senior managers and employees from Fujitsu Limited andeach Group company shall make periodic reports to thestatutory auditors on issues relating to the execution ofbusiness operations.

<Provisions to Ensure Effectiveness>q Senior managers from Fujitsu Limited and each Group

company shall regularly exchange information with thestatutory auditors.

w The Corporate Internal Audit Division shall regularly reportits findings to the statutory auditors.

e The statutory auditors shall, on an as-needed basis, receivepresentations or reports from the accounting auditors on theiraccounting audit findings and shall, on a regular basis,exchange information.

* In The FUJITSU Way, the term ‘employees’ refers to employees of the FujitsuGroup. The same usage is applied in these basic policies.

(iii) Status of Audits by Statutory Auditors, Internal Audits,and Accounting Audits

Fujitsu has adopted a statutory auditor system. Auditors attendimportant management meetings, including those held by theBoard of Directors, the Management Strategy Council, and theManagement Council, to audit the Board of Directors andoperational execution bodies. In addition, the Corporate InternalAudit Division has been established so serve as an internal auditgroup. This division audits the internal affairs of the Company andits affiliates, proposes improvement in their business practices, andregularly reports its audit findings to the Management Council.

Accounting audits are carried out by Ernst & YoungShinNihon, which reports to the Board of Statutory Auditors onthe auditing plan and auditing results, and when necessary,exchanges opinions and conducts joint audits with the statutoryauditors. Accounting audit work is carried out by four certifiedpublic accountants at Ernst & Young ShinNihon. They are YojiSuzuki (22 continuous years auditing the financial statements ofFujitsu*), Yuichi Mochinaga (9 years*), Noriyuki Tsunoda, andHideaki Karaki. Other Ernst & Young ShinNihon employees thatassist with the audits are 21 certified public accountants, 25 assis-tant certified public accountants, and 5 accounting staff members.* Ernst & Young ShinNihon has introduced a rotation system for employees

engaged in accounting audits. This move was voluntarily taken prior to theenactment of regulations based on the Certified Public Accountant Law and theimplementation of self-imposed rules by the Japanese Institute of Certified Pub-lic Accountants. Ernst & Young ShinNihon plans to implement this system fromthe current consolidated fiscal year.

38 Fujitsu Limited

(iv) Personal, Capital and Business Relationships andOther Interests between the Company and OutsideDirectors and Outside Auditors

1. Interests between the Company and Outside Directorsand Outside Auditors

The Company’s outside directors and outside auditors, listedbelow, have no special interests in the Company.Outside directors: Kunihiko Sawa, Ikujiro NonakaOutside auditors: Yoshiharu Inaba, Tamiki Ishihara,

Megumi Yamamuro

2. Interests between the Company and Companies at whichOutside Directors and Outside Auditors are Employed asDirectors or Auditors

Director Kunihiko Sawa is an advisor to Fuji Electric HoldingsCo., Ltd., the holding company of the Fuji Electric Group. FujiElectric Holdings holds 4.74% of Fujitsu stock and holds another6.68% through trust accounts for employee retirement benefits.Additionally, as of June 28, 2006, an advisor to Fujitsu Limitedwas serving as a director of Fuji Electric Holdings, in whichFujitsu has a 9.96% stake. Fujitsu Limited and Fuji Electric Hold-ings have a business relationship.

Auditor Yoshiharu Inaba is President and CEO of Fanuc, Ltd.,in which Fujitsu holds a 7.78% stake. As of June 28, 2006, a repre-sentative director of Fujitsu Limited was serving as an auditor ofFanuc. Fujitsu Limited and Fanuc have a business relationship.

Auditor Tamiki Ishihara is Chairman and RepresentativeDirector of Seiwa Sogo Tatemono Co., Ltd., which holds a 0.04%stake in Fujitsu Limited. The Fujitsu Group and Seiwa SogoTatemono have a business relationship.

Though not meeting the legal definition of an outside directorunder Japan’s Company Law, Fujitsu Limited director HiroshiOura serves as a director and senior executive advisor of AdvantestCorporation, in which Fujitsu holds a 10.09% stake through trustaccounts for employee retirement benefits. As of June 28, 2006, arepresentative director and an auditor of Fujitsu Limited wereserving as a director and an auditor of Advantest, respectively.Fujitsu Limited and Advantest have a business relationship.

(v) Status of Company’s Initiatives to EnhanceCorporate Governance

<Basic Stance>Comprising our mission, values, and code of conduct, TheFUJITSU Way is the core set of principles guiding the corporateand individual actions of the Fujitsu Group.

We pursue the sound and efficient execution of our businessactivities by striving to accelerate the penetration and implemen-tation of The FUJITSU Way and to promote structures andprocedures to ensure propriety throughout the Group in ourbusiness dealings.

<Status of Implementation>To accelerate the penetration and implementation of The FUJITSUWay, in July 2004 we established The FUJITSU Way PromotionCouncil, as a body reporting directly to the Management Council,and a Compliance Committee. In addition, we realigned the RiskManagement Committee and Environmental Committee, whichhad both previously operated independently, under The FUJITSUWay Promotion Council.

To promote risk management, The FUJITSU Way Promo-tion Council continuously monitors the implementation of riskprevention measures by working to raise awareness of risks andby gathering information on specific risks, including potentialones. Moreover, in anticipation of the enactment of Japan’s ver-sion of Sarbanes-Oxley legislation, in the second half of fiscal 2005we launched a project to construct an internal control system thatwill ensure the validity and credibility of our financial reports.Along with establishing a promotion organization dedicated tothis endeavor, we have been working to extend it across theGroup, including domestic and overseas subsidiaries, by build-ing up our promotion organization, accumulating know-how andcultivating personnel. The goals of the project also include achiev-ing greater efficiency through the pursuit of business processreforms across the Group.

The functions of the committees aligned under The FUJITSUWay Promotion Council are as follows:• Compliance Committee: This committee is responsible for pro-

moting structures and systems to ensure strict compliance withexternal as well as internal rules, regulations and norms ofbehavior. To support these efforts, since September 2004 wehave put in place a “helpline” system to serve as a confidentialliaison for receiving reports from employees and providing guid-ance to them on matters of conduct.

• Risk Management Committee: This committee takes measuresto obtain information regarding specific incidences of risk andminimize the impact of risk incidences on customers and theFujitsu Group. Serious issues are reported to the ManagementCouncil or Board of Directors for discussion and response.Through these measures, risk issues and countermeasures aredisseminated throughout the Fujitsu Group, strengthening ouroverall risk management posture.

• Environmental Committee: This committee is responsible forpromoting and strengthening the environmental protectionactivities of the Fujitsu Group, which are based on The FujitsuGroup Environmental Policy and The Fujitsu Group Environ-mental Protection Program.

We are taking into consideration the opinions of our account-ing auditors as we implement the project to construct an internalcontrol system that will ensure the validity and reliability of ourfinancial reports.


(II) Directors’ CompensationCompensation paid to directors and auditors during the fiscalyear under review is described below.

(Millions of yen)

Fixed Retirementcompensation Bonuses Allowances

Total Total TotalPeople Amount People Amount People Amount

Directors 12 245 0 0 2 45

Of which, outside 2 9 – – – –

Auditors 7 54 0 0 2 15

Total 19 299 0 0 4 60

Notes: 1. By resolutions passed at the Annual Shareholders’ Meeting, the upperlimits of compensation for all directors and all auditors, respectively, wereas follows:Directors: ¥60 million per month (Resolution passed at the Annual Share-

holders’ Meeting in 1991.)Auditors: ¥5 million per month (Resolution passed at the Annual Share-

holders’ Meeting in 1989.)The upper limits were amended by a resolution passed at the AnnualShareholders’ Meeting held on June 23, 2006, as follows:

Directors: ¥600 million per monthAuditors: ¥100 million per month

2. The numbers of directors and auditors in the table above include direc-tors and statutory auditors who resigned in June 2005.

(III) Compensation Paid to Accounting AuditorsTotal compensation to be paid by the Company and its consoli-dated subsidiaries to Ernst & Young ShinNihon: ¥682 million.Of this amount, the sum to be paid as compensation for perform-ing the audit under Article 2.1 of the Certified Public Accoun-tants Law (Act No. 103, 1947): ¥597 million.

Of this amount, the sum to be paid by the Company as com-pensation to the accounting auditors: ¥224 million.

The Company does not clearly differentiate the amounts ofcompensation for an audit under the former Law for SpecialExceptions to the Commercial Code Concerning Auditors ofKabushiki Kaisha (Act No. 22 in 1974) from an audit under theSecurities and Exchange Law (Act No. 25 of 1948), and theamount stated above thus includes the compensation for the auditunder the Securities and Exchange Law.

Annual Shareholders’ MeetingElection/dismissalElection/dismissal Election/dismissalReport

Report

Report

Report

Supervision

Board of Directors10 directors (including 2 outside directors) Audit

Audit

Audit

Audit Audit

Board of Statutory Auditors 5 auditors (including 3 outside auditors) Accounting Auditor

Election/dismissal/supervision

President & Representative Director

Management CouncilDecisions re. business execution

Management Strategy CouncilDecisions re. management strategy

Corporate Internal Audit Division

Instruction/report

Instruction/direction

Executive Functions The FUJITSU Way Promotion Council

Compliance Committee Risk Management Committee Environmental Committee

Executive Officers(52 corporate executive officers)

Business Groups/Group Companies

(vi) Our Corporate Governance System

40 Fujitsu Limited

Listed below are the principal business and other risks affectingthe Fujitsu Group (Fujitsu Limited and its consolidated subsid-iaries) that we believe may influence investors’ decisions. With aview to proactively disclosing information to investors, we havealso included items that may not necessarily have significant bear-ing on such decisions. We are aware of these risks and are mak-ing efforts to prevent them from arising, avoid potential risksaltogether and immediately confront risks should they occur.Among the risks listed below are some items related to futuredevelopments, but the list only includes items that the Groupdeems necessary to publicly disclose as of June 28, 2006.

1. Economic and Financial Market TrendsEconomic and financial market trends have an impact on theGroup’s business results, financial base and other aspects of itsoperations. Examples of such risks are listed below.

1) Economic Trends in Key MarketsThe Fujitsu Group provides IT products and services, telecom-munications infrastructure equipment, as well as semiconductors,hard disk drives (HDDs) and other components, to corporateand institutional clients and consumers in every region of theglobe. Hence, sales and income generated from these operationsare greatly affected by economic conditions in each respectivemarket. This is particularly true of Japan, North America, andEurope, key markets where economic trends can significantlyimpact Fujitsu Group operations.

2) Hi-tech Market VolatilityThe IT sector is periodically subject to dramatic changes inthe balance of supply and demand that exceed the scope ofnormal cyclical market variations. This tendency is particu-larly evident with regard to semiconductors, PCs and othergeneral-purpose products.

The Fujitsu Group gives ample consideration to marketcycles and volatility when deciding to launch new products, ini-tiate volume production, or scale back production, among otheractions. Nonetheless, we may fail to accurately forecast marketchanges, or changes in market conditions could exceed our fore-casts. Accordingly, there is a risk that we may be unable to recoupinvestment costs, as well as the risk of opportunity losses.

Further, the Group continuously implements structuralreforms in a bid to respond to market changes. However, drasticmarket changes could force us to enact structural reforms on afar greater scale than initially expected, resulting in a temporaryincrease in related expenses.

3) Exchange RatesThe Fujitsu Group imports a substantial amount of componentsand materials and exports various products. While import andexport costs tend to roughly balance out over the course of a givenyear, sudden fluctuations in exchange rates and other factorscould force the Group to incur losses on foreign currency trans-lation. In addition, with respect to overseas assets held by theGroup, as well as liabilities, there is the possibility that exchangerate fluctuations could lead to depreciation of assets and/orappreciation of liabilities.

4) Interest RatesThe Fujitsu Group has interest-bearing loans with a balance inexcess of 900 billion yen, including items that are directlyimpacted by interest rate fluctuations. Consequently, risinginterest rates could increase capital procurement costs.

5) Capital MarketsStock market trends in Japan and overseas have a substantialeffect on the value of Group stockholdings in other companiesand the management of pension assets. Weak stock market per-formance could thus force us to incur losses on the devaluationof marketable securities held or a reduction in pension assets,exposing the Group to the risk of higher losses.

2. CustomersFujitsu Group operations are highly influenced by the businesstrends of strategic key customers. Examples of potential risks aredescribed below.

1) Changes in Customers’ IT Investment TrendsA large proportion of our IT systems and services business, aswell as communications infrastructure and other business, iswith telecommunications carriers, financial institutions, and largemanufacturers. The business environment within these indus-tries, including shifting market trends and structural reforms,could lead to changes in customers’ IT investment trends havinga significant impact on Group sales and profitability. In semi-conductors, HDDs and other operations where the Group pro-vides components and other products, both demand and pricesare impacted to a large extent by customers’ sales of PCs, digitalhome electronics, mobile phones, automobiles and other prod-ucts in which these parts are used. Accordingly, soft demand andfalling prices for customers’ products, or a decline in customers’market share, could negatively impact Group sales and earnings.

Alongside corporate clients, national and local governmentsrepresent another important customer base for the FujitsuGroup. In the UK, for example, government-related projects arean especially important part of our business. Accordingly, changesin the approach to e-Government and other national-level ITutilization policies being promoted in Japan and elsewhere couldimpact sales and profitability.

� Business and Other Risks


2) Ability to Maintain Lasting Ties with CustomersThe Fujitsu Group is committed to bolstering ties with custom-ers, striving to serve as a business partner and provide solutionsacross the full IT system lifecycle. For semiconductors, HDDsand other operations where the Group provides components andother products, business stability hinges on maintaining lastingties with customers that represent key sources of demand for ourproducts. An inability to secure repeat business with such cus-tomers could therefore affect sales and profitability.

3. Competitors/IndustryThe IT sector is characterized by intense competition and fast-paced technological innovation. Events within the industry oractions by competitors could therefore have a substantial impacton our business results. Examples of such potential risks arelisted below.

1) Price CompetitionIntensifying competition is directly linked to declining prices forproducts and services. Anticipating such technology- and com-petition-driven price erosion, we are pursuing a variety of mea-sures to reduce costs, including the introduction of ToyotaProduction System reforms, standardization of system develop-ment methodologies, and software modularization, as well asefforts to expand sales of new products and services. Despite thesesteps, the Group still faces the risk of larger-than-expecteddeclines in prices, as well as the risk of being unable to achievesufficient cost reductions and sales growth due to fluctuations inthe price of semiconductors and other components, either ofwhich could negatively impact Group sales and profitability.

2) Competition from New Market Entrants and OthersIn addition to challenges posed by existing industry peers,competition from new market entrants continues to intensifyin the IT sector. Today, new entrants continue to emerge inmarket areas where the Fujitsu Group wields a competitiveadvantage, thus entailing the risk that we may lose our com-petitive edge, or fail to secure a clear competitive advantage infuture business operations.

3) Competition in Technology DevelopmentTechnological advancement in the IT sector occurs at anextremely fast pace, leading to rapid obsolescence of productsand technologies. In this context, remaining competitiverequires the continuous development of state-of-the-art tech-nology. While the Fujitsu Group does its utmost to maintainhighly competitive technologies, a loss in competitiveness ver-sus other companies in the race to develop innovative technolo-gies could lead to a decline in the Group’s market share andprofitability, which would negatively impact sales and earnings.Further, sales and profitability could be affected by the develop-ment of groundbreaking technologies and other actions by com-petitors that would severely compromise the value of the Group’sproducts and services.

4. Suppliers, Alliances, etc.In the course of its operations, the Fujitsu Group conducts busi-ness with a range of different companies, including suppliersand alliance partners. Accordingly, any significant changes inrelationships with these and other business partners could affectGroup operations.

1) ProcurementThe Fujitsu Group utilizes sophisticated technologies to producea range of products. There is therefore a risk that we mayencounter difficulties in procuring a stable supply of certain keycomponents or, in cases where regular supply channels areunavailable, that we may be unable to secure alternative procure-ment sources. There is also the risk that the Group may be unableto sufficiently procure certain parts in the large volumes required.Moreover, natural disasters, accidents and other events, as wellas any deterioration in business conditions at suppliers, couldhinder the ability of business partners to provide the Group witha stable supply of required components. These and other eventscould cause delays in product shipments, resulting in postpone-ment in the delivery of products to customers and opportunitylosses, among other problems. In respect to component procure-ment, foreign exchange rate fluctuations, tight supply anddemand conditions, and other pressures could drive procurementcosts higher than initial estimates, leading to diminished returnson products, as well as lower sales due to the need to raise prod-uct prices. Additionally, while we make every effort to ensurethe quality of procured components, we cannot guarantee thatall components purchased will be free of defects. The discoveryof such issues could result in processing delays, as well as defec-tive products, opportunity losses, repair costs, and disposal costsfor defective goods, plus the potential obligation to pay damagesto customers.

2) Collaborations, Alliances and Technology LicensingTo enhance competitiveness, the Fujitsu Group works with alarge number of companies through technology collaborations,joint ventures and other means, a practice that we intend to con-tinue. If, however, as a result of managerial, financial, or othercauses, it becomes difficult to establish or maintain such collabo-rative ties or to gain sufficient results from them, the Group’sbusiness could be adversely affected. Moreover, many of our prod-ucts and services employ other companies’ patents, technologies,software, and trademarks with the consent of their owners. How-ever, there is no guarantee that other companies will continue togrant or license the right to use their property under termsacceptable to the Fujitsu Group.

42 Fujitsu Limited

5. Public Regulations, Public Policy, and Tax MattersThe business operations of the Fujitsu Group are impacted by avariety of public regulations and trends in public policy, as wellas laws pertaining to taxation. Specifically, wherever it operates,the Group must comply with a variety of regulations, such asauthorizations for business or investment, import/export regu-lations and restrictions, as well as laws pertaining to antimo-nopoly policies, intellectual property rights, consumers, theenvironment and recycling, labor conditions, and taxation. Earn-ings might be affected by increased compliance costs associatedwith measures to make stricter or otherwise revise such laws andregulations. We also provide solutions in certain fields and busi-ness domains such as healthcare and communications that aresubject to other public regulations, meaning that regulatorytrends in these sectors may potentially impact Group businesses.

6. Other Operational RisksThe Fujitsu Group makes every effort to eliminate known risksbut can offer no guarantee of its ability to always achieve everydesired outcome in the course of executing business operations.Some of the specific risks faced in this respect are detailed below.

1) Deficiencies or Flaws in Products and ServicesQuality is a core value of the Fujitsu Group. We are committedto improving quality at the design and development stages as wellas in manufacturing. We are also promoting stricter quality con-trol when purchasing components from external suppliers. Theseefforts notwithstanding, it is impossible to totally eliminate thepossibility of deficiencies or flaws occurring in products, includ-ing software. While the Group is also promoting softwaremodularization, standardization of development work, andenhanced security measures in order to improve the quality ofsystem development and other services, the possibility of defectsarising cannot be excluded. In the event that such deficiencies orflaws occur, the Group may have to initiate product recalls orrepairs, engage in system recovery work, pay damages to custom-ers or suffer opportunity losses, all of which would negativelyimpact Group sales and profitability.

Following incidents involving system troubles at the TokyoStock Exchange, in November 2005 we initiated comprehen-sive inspections of customer systems that play an important rolein supporting the societal infrastructure. In cooperation withour customers, we have been checking for any potential prob-lems in these systems, including the operating environment,software and hardware.

2) Project ManagementDue to such factors as the increasing scale of systems and morerigorous demands from customers, as well as the advance of opensystem environments, system development work is becomingincreasingly complex. At the same time, greater competition is lead-ing to increasingly intense pricing pressures. In the fiscal year endedMarch 2004, the emergence of certain loss-generating projects

prompted the Group to implement extensive risk managementmeasures, including standardized guidelines for projects of a setscale and above, the introduction of the percentage-of-completionmethod, and other measures to help prevent the occurrence andenhance the early identification of such projects. In the fiscal yearended March 2005, we strengthened these efforts by establishing anew organization to screen projects at the contract negotiationphase and curtail the occurrence of projects with deteriorating prof-itability. Additionally, in April 2005 we established the SystemsIntegration Assurance Unit, a body with enhanced powers thatreports directly to the president. In this way, along with revisingour approach to making contracts with customers, and advancingthe standardization of sales and system engineering business pro-cesses, we are working to manage risk from the business negotia-tion stage through actual project implementation and therebyprevent new incidences of loss-generating projects. Along withthese measures, the Group continues to maintain reserves for lossesas necessary. Nevertheless, in spite of these measures, there is apossibility that we may be unable to completely prevent the occur-rence of loss-generating projects.

3) Investment DecisionsIn the IT industry, large investments in R&D and facilities andequipment are necessary to maintain competitiveness. Accord-ingly, the success or failure of investment choices has a pro-found effect on the business results of the Fujitsu Group. Whenmaking such investment decisions, we give ample considerationto a range of factors such as market trends, customer needs,the superiority of Group technologies and our business portfo-lio. There is, however, the risk that promising markets and tech-nologies identified by the Group may fail to grow as anticipated,or that supply and demand imbalances or price erosion may bemore severe than expected. Investment in semiconductor facili-ties and equipment represents one such area with a high degreeof risk. In addition to substantial funding requirements, thisfield is characterized in particular by short product cycles, majorchanges in the market landscape and stiff competition fromother companies. The Group takes a number of steps to miti-gate this risk, including responding to these inherent fluctua-tions by dividing investment into multiple phases and forgingagreements with customers prior to investment. Nonetheless,there is no guarantee that the Group can generate sufficientreturns on such investments.

4) Intellectual Property RightsThe Fujitsu Group has accumulated technologies and expertisethat help distinguish its products from those of other compa-nies. Legal restrictions in certain regions, however, may impairour ability to fully protect some of the Group’s proprietary tech-nologies, with the result that we could be unable to effectivelyprevent the manufacture and sale of similar products developedby third parties using the Group’s own intellectual property.Moreover, the creation of comparable or superior technologies


by other companies could erode the value of the Group’s intel-lectual property. The Group has instituted internal policies,including stringent clearance procedures prior to launching newproducts and services, to ensure that no infringement of othercompanies’ intellectual property occurs. However, there is thepossibility that the Group’s products or technologies may befound to infringe on other companies’ intellectual property, andthat earnings may be impacted by such consequences as the needto pay for usage rights or cover costs associated with having tomodify designs. In addition, the Group has previously instituteda program to compensate employees for innovations that theymake in the course of their work, and will continue to imple-ment this program in the future in accordance with the revisionof Japan’s patent laws. Nevertheless, the Group faces potentialrisk from lawsuits initiated by employees in regard to compensa-tion for innovation created in the workplace.

5) Human ResourcesThe growth and profitability of the Fujitsu Group dependsheavily on human resources. As such, a major issue for the Groupis the ability to recruit and foster talented researchers, systemengineers, managers and other key personnel; the inability to doso could negatively impact Group growth and profitability.

6) Environmental PollutionWhile committed to minimizing environmental burden inaccordance with The FUJITSU Way and the Fujitsu GroupEnvironmental Policy, the Group cannot guarantee that envi-ronmental pollution will not occur as a result of its operations.Moreover, although we monitor soil and wastewater as well asengage in cleanup activities at former factory sites, this doesnot mean that pollution will not be found at such sites in thefuture. In the event that environmental pollution were to occuror be identified, cleanup and other costs could be incurred thatadversely affect Group earnings.

7) Information ManagementIn order to safeguard the personal and confidential informationof customers and business partners, the Group has taken suchmeasures as establishing strict regulations, instituting trainingprograms for employees, and providing consultation to businesssubcontractors. Nevertheless, the Group cannot absolutely guar-antee that information will not be leaked. In the unlikely eventthat this should occur, trust in the Fujitsu Group could declineand the Group may be obligated to pay damages to customers.

8) Credit Ratings and Other Factors that Affect Trust inthe Group

In addition to having a major influence on capital procurement,credit ratings by outside institutions serve as reliable sources ofinformation when conducting transactions with business part-ners. Lower credit ratings caused by failure to meet earningstargets, deteriorating financial conditions and other reasonscould influence our ability to procure needed funds, and placethe Group at a disadvantage in bidding for projects and in otherbusiness dealings.

7. Natural Disasters and Unforeseen IncidentsNatural disasters and other unforeseen situations could have amajor impact on the business results and financial standing ofthe Fujitsu Group. Examples of the potential risks posed arefound below.

1) Damage from Earthquakes, Other Natural Disastersand Accidents

The Group has taken measures to make its business sites moreresistant to earthquakes and conducts regular inspections anddisaster readiness drills. Nevertheless, there is a possibility thatthe Group may be prevented from continuing operations due todamage to facilities and equipment or interruptions in the sup-ply of electricity or water as a result of earthquakes or other natu-ral disasters and accidents. Such occurrences could interruptshipments to customers or disrupt shipments of parts for theGroup’s internal use, thereby affecting factory production atother Group business sites. Semiconductor fabs and other plantswhere high-precision processing is carried out are particularlysusceptible to the effects of earthquakes and similar events. Inthe wake of such incidents, some time may be required to resumenormal operations due to the array of highly specialized equip-ment and devices used at these sites. Damage caused by naturaldisasters may also hinder our ability to provide information sys-tem support for Group customers, which could interrupt theirbusiness activities.

We have a well-developed system in place to ensure theintegrity and stable operation of critical in-house networks, whichare a key element of our business infrastructure. However, theGroup cannot guarantee its ability to prevent invasive computerviruses and other disruptions from impeding network operations.

2) Geopolitical RiskConflicts, political instability, currency crises, natural disasters,epidemics or other events in nations or regions where the FujitsuGroup operates could have a significant impact on its businesses.

44 Fujitsu Limited

Five-Year Summary ........................................................................... 45

Management’s Discussion and Analysis of Operations ............... 46

Consolidated Balance Sheets ............................................................ 54

Consolidated Statements of Operations ........................................ 56

Consolidated Statements of Shareholders’ Equity ....................... 57

Consolidated Statements of Cash Flows ........................................ 58

Notes to Consolidated Financial Statements ................................ 59

Independent Auditors’ Report ......................................................... 82

Contents

Financial Section

44 Fujitsu Limited



(excluding per share data, D/E ratio, and number of employees)

Years ended March 31 2002 2003 2004 2005 2006 2006

Net sales ¥5,006,977 ¥4,617,580 ¥4,766,888 ¥4,762,759 ¥4,791,416 $40,605,220Operating income (loss) (74,426) 100,427 150,342 160,191 181,488 1,538,034Income (loss) before income taxes

and minority interests (594,733) (147,606) 157,018 223,526 118,084 1,000,712Net income (loss) (382,542) (122,066) 49,704 31,907 68,545 580,890

Total assets ¥4,595,804 ¥4,225,361 ¥3,865,589 ¥3,640,198 ¥3,807,131 $32,263,822Shareholders’ equity 853,756 702,390 827,177 856,990 917,045 7,771,568

Amounts per share of common stock(Yen and U.S. dollars):Earnings (loss)

Basic ¥ (192.98) ¥ (61.29) ¥ 24.55 ¥ 15.42 ¥ 32.83 $ 0.278Diluted (192.98) (61.29) 22.24 13.86 29.54 0.250

Cash dividends 5.00 – 3.00 6.00 6.00 0.051Shareholders’ equity 426.52 350.84 413.22 414.18 443.20 3.756

Interest-bearing loans ¥1,760,626 ¥1,763,769 ¥1,277,121 ¥1,082,788 ¥ 928,613 $ 7,869,601D/E ratio (times) 2.06 2.51 1.54 1.26 1.01Free cash flow (102,892) 53,382 371,434 262,103 170,895 1,448,263

R&D expenses ¥ 349,855 ¥ 285,735 ¥ 250,910 ¥ 240,222 ¥ 241,566 $ 2,047,169Capital expenditure 306,966 147,620 159,795 181,402 249,999 2,118,636

Number of employees 170,111 157,044 156,169 150,970 158,491

Net sales by customers’geographic location:Japan ¥3,460,915 ¥3,280,665 ¥3,378,265 ¥3,340,664 ¥3,199,842 $27,117,305Europe 643,260 568,763 605,051 633,243 689,774 5,845,542The Americas 542,144 390,482 324,269 320,971 388,131 3,289,246Others 360,658 377,670 459,303 467,881 513,669 4,353,127

Total ¥5,006,977 ¥4,617,580 ¥4,766,888 ¥4,762,759 ¥4,791,416 $40,605,220

Notes: 1. See Note 17 of Notes to Consolidated Financial Statements for specific calculation of basic and diluted earnings per share.2. The U.S. dollar amounts stated above and in the following Management’s Discussion and Analysis of Operations have been translated from yen, for

readers' convenience only, at the rate of ¥118 = US$1, which was the approximate rate on the Tokyo Foreign Exchange Market at March 31, 2006.3. Cash dividends per share of common stock for the year ended March 31, 2006 are the total of interim and year-end dividends approved by the

Company's board of directors on October 27, 2005 and at the Annual Shareholder's Meeting on June 23, 2006, respectively.4. The capital expenditure stated above excludes intangible assets.

� Five-Year SummaryFujitsu Limited and Consolidated Subsidiaries

46 Fujitsu Limited

The following section, Management’s Discussion and Analysis of

Operations, provides an overview of the consolidated financial state-

ments of Fujitsu Limited (the “Company”) and its consolidated subsid-

iaries (together, the “Group”) for the year ended March 31, 2006 (fiscal

2005). Forward-looking statements in this section are based on

management’s understanding and best judgment as of March 31, 2006.

1. Analysis of Results

Business Environment

Compared to previous years, the business environment in which the

Fujitsu Group operates was relatively stable during fiscal 2005. While

soaring crude oil prices and higher prices for raw materials, as well as

rising interest rates in the US, were cause for concern, the global economy

was boosted by growth in the US and Asia, especially China. Japan’s

economy also shifted to a firmer footing, helped by rising equity mar-

kets, a recovery in corporate earnings resulting from solid export growth,

and an upturn in household spending.

With respect to IT investment, there was continued robustness in over-

seas markets, and even within Japan, which had been seen as lagging other

markets, there was evidence of more aggressive spending on the part of

corporations seeking to ensure their future competitiveness, particularly

companies in the telecommunications and financial services industries.

Corporations are now broadening their objectives for employing IT

systems. While in the past the focus was on boosting management and

operational efficiency, IT systems are increasingly being used to support

innovation on the front lines of sales and marketing, product develop-

ment, manufacturing, procurement and distribution. In line with the

broader role IT systems are playing in corporate management, there is

now greater emphasis being placed on addressing the rising need for

security and business continuity, as well as on strengthening internal con-

trol in light of corporate regulatory reforms. In daily life as well, the

expansion of IT networks into the fabric of society is enhancing services

in such areas as medical and nursing care, education, and entertainment.

Recognizing the central role Fujitsu plays in supporting the infrastruc-

tures that underpin our customers’ businesses, as well as society as a

whole, we are very conscious of the important responsibility we bear in

maintaining the reliability of IT and in proposing new related applica-

tions. Going forward, along with placing even further emphasis on

ensuring stable systems operation, we will seek to take the lead in dem-

onstrating new uses of IT in our own operations. In addition, all of our

employees are committed to conducting themselves in a manner deserv-

ing of customers’ trust and that meets their high expectations. Seeking

to serve as a valued and indispensable partner in the operation and man-

agement of our customers’ businesses, we will strive to continuously pro-

vide the most advanced and efficient solutions based on superior

technology and sophisticated services.

Net Sales

Consolidated net sales for fiscal 2005 were ¥4,791.4 billion

(US$40,605 million), an increase of 0.6% over the previous fiscal year.

Excluding the impact of a change in accounting policies from this fiscal

year and the transfer of our flat panel display businesses last fiscal year,

net sales increased by 2.4%. In Japan, sales of server-related products and

PCs declined, but optical transmission systems in North America,

outsourcing services in the UK, consulting services in North America,

and HDDs for overseas markets all posted significantly higher sales.

� Management’s Discussion and Analysis of Operations

2002

2003

2004

2005

2006

5,006

4,617

4,766

4,762

4,791

(¥ Billions)

■ Net Sales

(Years ended March 31)


Cost of Sales, Selling, General & Administrative

Expenses, and Operating Income

In fiscal 2005, the cost of sales was ¥3,523.4 billion (US$29,860

million), while selling, general and administrative (SG&A) expenses

were ¥1,086.5 billion (US$9,208 million). The cost of sales ratio and

the ratio of SG&A expenses to net sales improved by 0.3 and 0.1 of a

percentage point, respectively, to 73.5% and 22.7%.

Consolidated operating income was ¥181.4 billion (US$1,538

million), an increase of ¥21.2 billion over the previous fiscal year.

Excluding a positive impact of ¥4.8 billion stemming from the change in

accounting policies this fiscal year, operating income increased by ¥16.4

billion. Income was affected by factors such as intensified competition in

server-related markets in Japan and overseas, as well as forward-looking

investments including accelerated development expenses for certain

products and expenses related to start-up of the 300mm wafer semicon-

ductor production facility (Fab No. 1) at our Mie Plant. However, this

was offset by higher sales of optical transmission systems, outsourcing

services, and HDDs, as well as by cost reductions stemming from

enhanced initiatives in manufacturing innovation, significantly lower

losses from loss-generating projects in our domestic systems integration

business, and the effect of restructuring our flat panel display business,

together enabling us to post higher profits.

Other Income (Expenses) and Net Income

Other expenses, net totaled ¥63.4 billion (US$537 million). Net inter-

est, comprising interest and dividend income and interest charges, was

negative ¥8.5 billion (US$73 million), an improvement of ¥1.0 billion

compared to a year earlier and reflecting a decrease in interest-bearing

loans and other factors. Equity in earnings of affiliates, net was a loss of

¥1.4 billion (US$13 million). Separately, we booked a loss on change in

interest of ¥8.4 billion (US$71 million) related to the initial public offer-

ing of Spansion Inc. Amortization of unrecognized obligation for retire-

ment benefits was ¥28.2 billion (US$239 million), an improvement of

¥11.0 billion, due to revisions in the Company’s pension system in Japan.

With effect from the fiscal year under review, we began booking a provi-

sion for prior product warranties as an expense under other income

(expenses). This is related to the provision to cover warranty-related costs

for products sold in prior fiscal years and totaled ¥7.4 billion (US$63

million) in the year under review. In addition, we booked a settlement

gain of ¥15.9 billion (US$135 million) related to the reconciliation of

litigation brought against component vendors and other parties in fiscal

2001 with respect to our HDD business. In addition, there was a gain

on business transfer of ¥3.4 billion (US$29 million) related to the trans-

fer of LCD panel operations.

We recognized ¥37.0 billion (US$314 million) as income taxes, which

combines current and deferred income taxes, against ¥118.0 billion

(US$1,001 million) of income before income taxes and minority interests.

This represented a significant decrease in taxes over fiscal 2004, when the

tax burden was higher due to the booking of a large valuation allowance on

deferred tax assets. Net income for fiscal 2005 was ¥68.5 billion (US$581

million), an increase of ¥36.6 billion compared to a year earlier.

2002

2003

2004

2005

2006

Operating Income (¥ Billions)Operating Income Margin (%)

181

(74)

100

150

160

3.8

(1.5)

2.2

3.2

3.4


■ Operating Income and Operating Income Margin

48 Fujitsu Limited

2. Segment Information

Business Segment Information

The following section provides information on net sales (including

intersegment sales) and operating income in each of our principal busi-

ness segments. Business segment classifications were changed with effect

from the year under review, and year-on-year comparisons are based on

figures adjusted to reflect this change.

Technology Solutions

Consolidated net sales in this segment were ¥2,983.9 billion (US$25,288

million), up 1.7% over fiscal 2004. Although sales of servers and related

products declined in Japan due to sluggish IT investment and the absence

of special demand generated by the redesign of Japanese bank notes in

the previous fiscal year, overall sales for the segment increased, thanks to

the continued strength of our UNIX server business outside Japan, our

North American optical transmission systems business, and our

outsourcing services business in the UK, as well as the expansion of our

consulting services business in North America.

Operating income for the segment was ¥164.2 billion (US$1,392

million), an increase of ¥22.1 billion over the previous year. Despite

intensified competition in the server and related markets both inside and

outside Japan, and the effect of accelerating development expenses for

next-generation models of mobile phone base stations, optical transmis-

sion systems and server-related products, the segment posted a marked

increase in operating income due to a large reduction in losses from loss-

generating projects and continued strong performance by our

outsourcing services business in the UK.

In November 2005, we signed a global technology alliance agreement

with Electronic Data Systems Corporation that includes the supply of

our PRIMEQUEST mission-critical IA servers. This agreement, along

with joint development alliances with other companies, is designed to

strengthen our sales capabilities and methods. In addition, to further

expand business related to our TRIOLE IT infrastructure optimiza-

tion model on a global basis, we opened new system verification centers

in Singapore, Korea and Shanghai, China, where we provide customers

with comprehensive verification and evaluation support for platform

products in open-standard system environments. The new centers

complement existing facilities in Japan, the UK, Germany, and

California in the US.

Also, in March 2006 we signed an agreement with BT Group plc

under which we have been designated as a preferred supplier to BT’s

21st Century Network program. Going forward, we will provide BT

with infrastructure products for next-generation networks utilizing the

most advanced technology.

In our systems integration business in Japan, we were able to reduce

the occurrence of loss-generating projects to an acceptable level as a result

of measures including the establishment of an organizational unit dedi-

cated to bolstering project auditing and assurance, the integration of sales

and system engineering groups into teams organized along customer

lines, and the institution of a real-time project progress management

system. Moreover, we are endeavoring to further improve productivity

by configuring products in accordance with the TRIOLE concept and

utilizing development tools such as our System Development Architec-

ture and Support (SDAS) framework.

In addition, we are working to accelerate the expansion of our busi-

ness outside Japan, for example, through development of such new busi-

nesses as palm vein authentication security systems and automated

self-checkout machines for retailers, and through the acquisition of

Rapidigm, Inc., an IT consulting and integration firm with about 2,000

consultants in North America and India.

Ubiquitous Product Solutions

Net sales in the Ubiquitous Product Solutions segment were ¥1,059.9

billion (US$8,982 million) an increase of 2.8% over fiscal 2004. Although

sales of PCs increased overseas, they declined overall due to intensified

competition in Japan. Continued strong growth in HDD sales, how-

ever, enabled the segment as a whole to achieve an increase in sales.

Operating income for Ubiquitous Product Solutions was ¥34.4

billion (US$292 million), an increase of ¥3.1 billion compared to the

previous fiscal year. Although the decline in the value of the yen against

other currencies led to an increase in component costs, this impact was

offset by cost efficiencies and quality improvements generated by manu-

facturing innovation initiatives, as well as higher HDD sales, resulting

in an overall increase in operating income.

To strengthen our HDD business, in addition to expanding the range

of models and production capacity for our 2.5” HDDs, we will also enter

the 1.8” HDD market for mobile devices, where demand is expected to

grow. Looking ahead, we will continue our commitment to product

quality, focus our resources on promising growth markets, and seek to

further strengthen growth opportunities worldwide by entering into

strategic alliances with other companies.


Device Solutions

Net sales of Device Solutions were ¥707.5 billion (US$5,996 million),

a decrease of 11.0% compared to fiscal 2004. Excluding the impact of

the transfer of our flat panel display businesses, sales on a continuing

operations basis increased by 0.5%. In the LSI Devices sub-segment,

memory sales decreased as a result of a decline in market prices, but the

market for logic chips recovered in the latter half of the fiscal year, espe-

cially for devices used in mobile phone and digital consumer electronics

applications. The start of volume production at our new 300mm wafer

semiconductor fabrication facility also contributed to sales. The combi-

nation of these factors contributed to a slight overall increase in logic

device sales, mostly from overseas sales, compared to the prior fiscal year.

Operating income for Device Solutions was ¥33.3 billion (US$282

million), an increase of ¥0.7 billion compared to the previous fiscal year.

Although operating income in the LSI Devices sub-segment declined as

a result of the weakness of the market during the first half of the fiscal

year, as well as the impact of expenses relating to start-up of the 300mm

wafer production facility at our Mie Plant that began operation in April

2005, the Electronic Components, Others sub-segment continued to

post strong results, and losses associated with the flat panel display busi-

nesses were eliminated. As a result of these factors, overall operating

income improved slightly over fiscal 2004.

The new 300mm wafer semiconductor fabrication facility at our

Mie Plant (Fab No. 1) commenced volume shipments as scheduled

from September 2005. Moreover, in order to meet the growing

demand for leading-edge technology products, we decided in January

2006 to build an additional 300mm wafer facility (Fab No. 2) at the

Mie Plant. Going forward, we will concentrate our resources in logic

LSI devices and work to further strengthen this business while strik-

ing a balance between advanced technology products to drive future

growth and standard products that support our existing business. In

December 2005, Spansion, Inc., our joint venture with Advanced

Micro Devices, Inc. in the flash memory business, issued new shares

in tandem with its initial public offering. As a result, our ownership

share changed from 40.0% to 25.2%.

Net Sales and Operating Income by Business Segment(including intersegment)

(¥ Billions)Increase

(Decrease)Years ended March 31 2005 2006 Rate (%)

Net sales

Technology Solutions . . . . . . . . ¥2,934 ¥2,983 1.7

Ubiquitous Product Solutions . . 1,031 1,059 2.8

Device Solutions . . . . . . . . . . . . 794 707 (11.0)

Other Operations . . . . . . . . . . . 377 447 18.6

Intersegment elimination . . . . . (375) (407)

Consolidated net sales . . . . . . . ¥4,762 ¥4,791 0.6

IncreaseYears ended March 31 2005 2006 (Decrease)

Operating income (loss)

Technology Solutions . . . . . . . . ¥142 ¥164 ¥22

Ubiquitous Product Solutions . . 31 34 3

Device Solutions . . . . . . . . . . . . 32 33 0

Other Operations . . . . . . . . . . . 9 7 (1)

Unallocated operating costs

and expenses/

intersegment elimination . . . . . (54) (58) (3)

Consolidated operating income . . ¥160 ¥181 ¥21

Geographic Segment Information

Net sales (including intersegment sales) and operating income were gen-

erally level with the previous fiscal year in Japan. However, sales and

income increased in Europe, the Americas and Others (Asia, Australia

and other regions).

Japan

Net sales were ¥3,944.4 billion (US$33,427 million), down 2.0% over

fiscal 2004, but roughly level if the impact of the transfer of flat panel

display operations is excluded.

Operating income was ¥185.8 billion (US$1,575 million), a decline

of ¥1.9 billion compared to a year earlier, but level after excluding the

impact of change in accounting policies. On the one hand, this largely

unchanged result reflected the absence of loss-making flat panel display

businesses following their transfer and a significant drop in losses from

loss-generating projects in the domestic systems integration business.

However, sluggish sales of server-related products in Japan, costs related

to accelerated development of next-generation mobile phone base sta-

tions, optical transmission systems and server-related products, and

expenses associated with start up the new 300mm wafer semiconductor

fabrication facility at our Mie Plant (Fab No. 1), all weighed on earnings.

50 Fujitsu Limited

Europe

Net sales were ¥632.5 billion (US$5,361 million), up 6.0% year on year.

Despite the impact of the transfer of flat panel display businesses, sales

grew primarily due to a strong performance by our outsourcing busi-

ness in the UK.

Operating income was ¥22.9 billion (US$194 million), an increase

of ¥11.2 billion compared to fiscal 2004. This reflected the benefits of

higher sales from Fujitsu Services, as well as the impact of change in

accounting policies.

The Americas

Net sales were ¥363.4 billion (US$3,080 million), up 21.6% year on year.

Operating income increased by ¥9.2 billion to ¥13.5 billion (US$115

million). This growth in sales and income was mainly attributable to

strong sales of optical transmission systems, as well as expansion in the

UNIX server and consulting businesses in North America.

Others

Net sales were ¥718.8 billion (US$6,092 million), an increase of 19.2%

compared to a year earlier. Operating income rose ¥2.7 billion to ¥14.9

billion (US$126 million). Stronger sales of HDDs were the primary

reason for the overall increase in sales and income.

Net Sales and Operating Income by Geographic Segment(including intersegment)

(¥ Billions)Increase


Net sales

Japan . . . . . . . . . . . . . . . . . . . . ¥4,024 ¥3,944 (2.0)

Europe . . . . . . . . . . . . . . . . . . . 596 632 6.0

The Americas . . . . . . . . . . . . . . 298 363 21.6

Others . . . . . . . . . . . . . . . . . . . 602 718 19.2

Intersegment elimination . . . . . (760) (867)

Consolidated net sales . . . . . . . ¥4,762 ¥4,791 0.6

IncreaseYears ended March 31 2005 2006 (Decrease)

Operating income (loss)

Japan . . . . . . . . . . . . . . . . . . . . ¥187 ¥185 ¥ (1)

Europe . . . . . . . . . . . . . . . . . . . 11 22 11

The Americas . . . . . . . . . . . . . . 4 13 9

Others . . . . . . . . . . . . . . . . . . . 12 14 2

Unallocated operating costs

and expenses/

intersegment elimination . . . . . (55) (55) 0

Consolidated operating income . . ¥160 ¥181 ¥21

3. Capital Resources and Liquidity

Improvement in Financial Condition

Since fiscal 2003, in response to a significant deterioration in the Group’s

financial condition as a result of the collapse of the IT bubble, we have

made progress in improving the soundness of our financial position.

Specifically, in the year under review, operating cash flow improved due

to a recovery in earnings from business operations and greater efficiency

in utilizing working capital, and we used this to reduce interest-bearing

loans. As of March 31, 2006, the balance of interest-bearing loans was

¥928.6 billion (US$7,870 million), below our target of ¥1,000 billion.

Likewise, the D/E ratio was reduced to 1.01, close to our medium-term

goal of 1.0. In addition, during fiscal 2005, the Fujitsu Welfare Pension

Fund (the “Plan”), in which the Company and its consolidated subsid-

iaries in Japan participate, received approval from the government for

revisions to the pension system and for the return of the past substitu-

tional portion of the Plan. As a result of significant improvement in the

financial markets during the second half of the fiscal year, the unrecog-

nized obligation for retirement benefits at March 31, 2006 was dissolved.

Assets, Liabilities and Shareholders’ Equity

Total assets at the end of fiscal 2005 were ¥3,807.1 billion (US$32,264

million), an increase of ¥166.9 billion from the end of the previous fiscal

year. Total current assets were ¥1,932.7 billion (US$16,379 million), a

decrease of ¥48.7 billion from the end of the last fiscal year as a result of

greater efficiency in utilizing working capital. Total fixed assets increased

to ¥1,874.3 billion (US$15,885 million), up ¥215.7 billion compared to

the end of the last fiscal year. This was primarily due to an increase in prop-

erty, plant and equipment less accumulated depreciation from capital

expenditures and an increase in the market value of marketable securities.

2002

2003

2004

2005

2006

5,006

4,617

4,766

4,762

4,791

JapanEuropeThe AmericasOthers

(¥ Billions)

■ For reference: Net Sales by Customers’

Geographic Location



Total liabilities were ¥2,717.0 billion (US$23,026 million), an

increase of ¥98.0 billion compared to the end of the previous fiscal year.

There was a large one-time increase in accrued severance benefit associ-

ated with the change in pension accounting for our UK subsidiaries,

whereby unrecognized pension obligations were recorded as liabilities.

The balance of interest-bearing loans totaled ¥928.6 billion (US$7,870

million) at fiscal year-end, achieving the target of ¥1,000 billion or less as

a result of loan repayments.

Total shareholders’ equity was ¥917.0 billion (US$7,772 million), an

increase of ¥60.0 billion over the end of fiscal 2004. The increase was pri-

marily attributable to increased profits and unrealized gains on market-

able securities as a result of the rise in the stock market. As a result of the

foregoing, the D/E ratio nearly reached our medium-range target level of

1.0 and the shareholders’ equity ratio rose to 24.1%, reflecting the continu-

ing improvement in the Company’s overall financial condition.

Summary of Cash Flows

Net cash provided by operating activities during fiscal 2005 was ¥405.5

billion (US$3,437 million), exceeding ¥400.0 billion for the first time in

five years. This represented an increase of ¥128.3 billion compared with

the previous fiscal year, resulting from an increase in internal reserve due

to the recovery in principal business operations, and greater efficiency in

the use of assets through an improvement in working capital.

Net cash used in investing activities was ¥234.6 billion (US$1,989

million), an increase in outflows of ¥219.5 billion compared with the

previous fiscal year. Excluding the impact of the sale of marketable secu-

rities in fiscal 2004, outflows increased by ¥51.2 billion. The increase

was primarily attributable to higher capital expenditures, including for

the 300mm wafer semiconductor production facility (Fab No. 1) at the

Mie Plant.

Free cash flow, the sum of operating and investment cash flows, was

positive ¥170.8 billion (US$1,448 million). Excluding the impact of the

sale of marketable securities in fiscal 2004, this represented an increase

in free cash flow of ¥77.1 billion over fiscal 2004.

Net cash used in financing activities was ¥207.8 billion (US$1,761

million), as free cash flow was used to repay borrowings.

As a result of the above factors, cash and cash equivalents at the end

of the fiscal year totaled ¥420.8 billion (US$3,567 million).

2002

2003

2004

2005

2006 170

(102)

53

371

262

(¥ Billions)

■ Free Cash Flow


2002

2003

2004

2005

2006

Total Assets (¥ Billions)Total Assets Turnover Ratio (Times)

3,8071.29

1.02

1.05

1.18

1.27

4,595

4,225

3,865

3,640

(As of March 31)

■ Total Assets/Total Assets Turnover Ratio

2002

2003

2004

2005

2006

Shareholders’ Equity (¥ Billions)Shareholders’ Equity Ratio (%)

91724.1

853

702

827

856

18.6

16.6

21.4

23.5

■ Shareholders’ Equity/Shareholders’ Equity Ratio

(As of March 31)

52 Fujitsu Limited

4. Capital Expenditure

In fiscal 2005, capital expenditure, which was targeted at the most prom-

ising growth sectors such as outsourcing services and LSI-related opera-

tions, and was used to prepare for future business development, totaled

¥249.9 billion (US$2,119 million). By business segment, capital expen-

diture was ¥93.1 billion (US$790 million) in Technology Solutions,

¥19.4 billion (US$165 million) in Ubiquitous Product Solutions,

¥115.5 billion (US$979 million) in Device Solutions, and ¥21.8 billion

(US$185 million) for general corporate and other areas.

Capital Expenditure (¥ Billions)Increase


Technology Solutions . . . . . . . . ¥ 65 ¥ 93 41.4

Ubiquitous Product Solutions . . 17 19 12.7

Device Solutions . . . . . . . . . . . . 76 115 51.7

Corporate and others* . . . . . . . 22 21 (1.3)

Total . . . . . . . . . . . . . . . . . . . . . ¥181 ¥249 37.8

Japan . . . . . . . . . . . . . . . . . . . . 142 190 34.0

Overseas . . . . . . . . . . . . . . . . . 39 59 51.9* Non-allocable capital expenditure for shared R&D and parent company

management divisions

5. Consolidated Subsidiaries

At the end of fiscal 2005, the Company had 392 consolidated subsidiar-

ies, 121 in Japan and 271 overseas, representing a decrease of 11 from

last year’s total of 403. Although there was significant M&A activity by

our services subsidiary in North America, restructuring of our domes-

tic development firms and liquidation of overseas subsidiaries resulted

in the overall decrease. The number of affiliated companies accounted

for by the equity method as of the fiscal year-end totaled 28, six fewer

than a year earlier.

6. Critical Accounting Policies and Estimates

Accounting Principles and Practices

The accompanying consolidated financial statements of the Group have

been prepared in accordance with accounting principles and practices

generally accepted in Japan and the regulations under the Securities and

Exchange Law of Japan. The accounting principles and practices adopted

by consolidated subsidiaries outside Japan conform to those of their

respective countries.

The preparation of the consolidated financial statements requires

management to make estimates and assumptions that affect the amount

of the assets, liabilities, contingent assets and contingent liabilities

reported at the end of the fiscal year, as well as the amount of revenue

and expenses recognized during that term. Actual results may differ from

these estimates.

The Group is discussing the requirements for the adoption of Inter-

national Financial Reporting Standards (IFRS). When these standards

are adopted, it is possible that differences may arise from financial state-

ments prepared under Japanese standards.

Revenue Recognition

Revenue from sales of IT systems and products, excluding software

development contracts, is recognized upon acceptance by the custom-

ers, whereas revenue from sales of personal computers, other equip-

ment and electronic devices is recognized when the products are

shipped. Revenue from software development contracts is recognized

on a percentage of completion basis.

We stringently assess the potential revenue recoverable on projects

for which estimated costs have exceeded estimated revenue, and recog-

nize as losses the amounts assessed as non-recoverable. If the estimated

costs relating to such contracts increase further in the future, additional

losses may be recognized.

Property, Plant and Equipment

Property, plant and equipment are carried at cost. Depreciation is com-

puted principally by the declining-balance method at rates based on the

estimated useful lives of the respective assets, which vary according to

their general classification, type of construction and function. In the

future, some equipment and facilities may become obsolete as a result of

technical innovation or other factors, and some equipment and facilities

may no longer be required as the result of withdrawal from certain busi-

nesses, in which case their actual useful lives may be recognized as shorter

than their originally estimated useful lives. Losses may occur as a result.

We adopted asset impairment accounting from fiscal 2005. Impair-

ment losses may be recognized in cases in which there is a decline in the

anticipated amount of future cash flows as a result of deterioration in the

projected results of a business unit.


Intangible Assets

Computer software for sale is amortized based on projected unit sales

volume during the period for which the projections are made. The pro-

jected unit sales volume is estimated based on a feasible sales plan, but

one-time losses may occur if anticipated unit sales fall short of the origi-

nal sales plan. Computer software for internal use is amortized by the

straight-line method over its estimated useful life. Losses may occur if

the actual useful life falls short of the initially estimated useful life.

Goodwill

Goodwill arising from the acquisition of a business, including those pur-

chased by consolidated subsidiaries, is amortized by the straight-line

method over the period corresponding to the premium of the acquired

business. Losses may be recognized when the business is withdrawn or

sold by the Group, or when the profitability of the acquired business

decreases during the period the Group expected the return.

Marketable Securities

Held-to-maturity investments, which are the debt securities which the

Group has the positive intent and ability to hold to maturity, are stated

at amortized cost, adjusted for the amortization of premium or discount

to maturity. Available-for-sale securities, which are “equity securities” or

“debt securities not classified as held-to-maturity,” are carried at fair

market value as of the balance sheet date of the fiscal year if a market

price is available. If no market price is available, they are carried at cost

based on the moving average method. Fluctuations in the market value

of available-for-sale securities for which market prices are available cause

fluctuations in the carrying value of marketable securities, resulting in

increases or decreases in shareholders’ equity. Impairment losses are rec-

ognized on available-for-sale securities when the market value or the net

worth falls significantly and is proved to be unrecoverable. If a signifi-

cant decline in market value occurs and is proved to be unrecoverable in

the future, additional impairment losses may need to be recognized.

Deferred Tax Assets

We record an appropriate balance of deferred tax assets against losses

carried forward and temporary differences. Future increases or decreases

in the balance of deferred tax assets may occur if projected taxable income

decreases or increases as a result of trends in future business results. In

addition, changes in the effective tax rate due to future revisions to taxa-

tion systems could result in increases or decreases of deferred tax assets.

Provision for Product Warranties

Some of the Company’s products are covered by contracts that require

us to repair or exchange them free of charge during a set period of time.

Based on past experience, we record a provision for estimated repair and

exchange expenses at the time of sale. The Group is taking steps to

strengthen quality management during the product development, manu-

facturing and procurement stages. However, should product defects or

other problems occur at a level in excess of that covered by the estimated

expenses, additional expenses may be incurred.

Retirement Benefits

Retirement benefit costs and obligations are determined based on cer-

tain actuarial assumptions. These assumptions include the discount rate,

rates of retirement, mortality rates, and the expected rate of return on

the plan assets. When actual results differ from the assumptions or when

the assumptions are changed, retirement benefit costs and obligations

can be affected. In the event an actuarial loss arises, the actuarial loss is

amortized using a straight-line method over employees’ average remain-

ing service period. Furthermore, revisions to accounting standards in

countries where overseas subsidiaries are located and in Japan could

potentially impact the Company’s retirement benefit costs and obliga-

tions, as well as shareholders’ equity.

Provision for Loss on Repurchase of Computers

Certain computers manufactured by the Group are sold to Japan

Electronic Computer Co., Ltd. (JECC) and other leasing companies.

Contracts with these companies require the buyback of the computers

if lease contracts are terminated. An estimated amount for the loss aris-

ing from such buybacks is provided at the time of sale and is recorded as

a provision. Any future changes in the usage trends of end-users may

result in additions or reductions to the provision.

54 Fujitsu Limited

U.S. DollarsYen (thousands)

(millions) (Note 3)

At March 31 2005 2006 2006

Assets

Current assets:

Cash and cash equivalents ¥ 454,516 ¥ 420,894 $ 3,566,898

Short-term investments (Note 4) 2,672 2,369 20,076

Receivables, trade (Note 16) 824,992 885,300 7,502,542

Allowance for doubtful accounts (6,586) (6,781) (57,466)

Inventories (Note 5) 478,510 408,710 3,463,644

Other current assets (Note 11) 227,433 222,256 1,883,526

Total current assets 1,981,537 1,932,748 16,379,220

Investments and long-term loans:

Affiliates (Note 6) 175,844 172,933 1,465,534

Other investments and long-term loans (Notes 4, 6, 10 and 11) 530,622 688,570 5,835,339

Total investments and long-term loans 706,466 861,503 7,300,873

Property, plant and equipment (Notes 7, 9 and 15):

Land 130,913 113,061 958,144

Buildings 720,449 707,586 5,996,492

Machinery and equipment 1,795,784 1,700,069 14,407,364

Construction in progress 29,991 35,673 302,313

2,677,137 2,556,389 21,664,313

Less accumulated depreciation (1,949,237) (1,779,413) (15,079,771)

Property, plant and equipment, net 727,900 776,976 6,584,542

Intangible assets (Note 15):

Software 133,847 127,471 1,080,263

Goodwill (Note 8) 81,569 85,250 722,458

Other intangible assets 8,879 23,183 196,466

Total intangible assets 224,295 235,904 1,999,187

Total assets ¥ 3,640,198 ¥ 3,807,131 $ 32,263,822

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

� Consolidated Balance SheetsFujitsu Limited and Consolidated Subsidiaries



(millions) (Note 3)

At March 31 2005 2006 2006

Liabilities, minority interests and shareholders’ equity

Current liabilities:

Short-term borrowings (Note 9) ¥ 102,079 ¥ 63,820 $ 540,847

Current portion of long-term debt (Note 9) 107,474 171,028 1,449,390

Payables, trade (Note 16) 735,981 757,006 6,415,305

Accrued expenses 323,473 351,176 2,976,068

Customers’ advances 34,956 38,912 329,763

Accrued income taxes 29,602 27,307 231,415

Other current liabilities (Notes 11, 15 and 16) 157,952 193,256 1,637,763

Total current liabilities 1,491,517 1,602,505 13,580,551

Long-term liabilities:

Long-term debt (Note 9) 873,235 693,765 5,879,364

Accrued retirement benefits (Note 10) 85,747 201,727 1,709,551

Provision for loss on repurchase of computers 56,467 43,371 367,551

Other long-term liabilities (Notes 11 and 15) 112,035 175,688 1,488,881

Total long-term liabilities 1,127,484 1,114,551 9,445,347

Minority interests in consolidated subsidiaries 164,207 173,030 1,466,356

Shareholders’ equity:

Common stock (Note 12)

Authorized—5,000,000,000 shares

Issued

2005—2,070,018,213 shares 324,625

2006—2,070,018,213 shares 324,625 2,751,059

Capital surplus 497,882 498,019 4,220,500

Retained earnings (Deficit) (7,823) (40,485) (343,093)

Unrealized gains on securities, net of taxes 98,076 179,714 1,523,000

Revaluation surplus on land, net of taxes 3,453 2,504 21,220

Foreign currency translation adjustments (57,980) (45,867) (388,703)

Treasury stock, at cost (1,243) (1,465) (12,415)

Total shareholders’ equity 856,990 917,045 7,771,568

Commitments and contingent liabilities (Note 13)

Total liabilities, minority interests and shareholders’ equity ¥3,640,198 ¥3,807,131 $32,263,822

56 Fujitsu Limited

� Consolidated Statements of OperationsFujitsu Limited and Consolidated Subsidiaries


(millions) (Note 3)


Net sales ¥4,766,888 ¥4,762,759 ¥4,791,416 $40,605,220

Operating costs and expenses:

Cost of sales 3,460,932 3,512,552 3,523,421 29,859,500

Selling, general and administrative expenses

(Note 18) 1,155,614 1,090,016 1,086,507 9,207,686

4,616,546 4,602,568 4,609,928 39,067,186

Operating income 150,342 160,191 181,488 1,538,034

Other income (expenses):

Interest and dividend income 6,668 8,643 10,495 88,941

Equity in earnings of affiliates, net (862) 3,691 (1,478) (12,525)

Interest charges (23,331) (18,247) (19,084) (161,729)

Other, net (Note 18) 24,201 69,248 (53,337) (452,009)

6,676 63,335 (63,404) (537,322)

Income before income taxes

and minority interests 157,018 223,526 118,084 1,000,712

Income taxes (Note 11):

Current 34,125 32,422 36,831 312,127

Deferred 58,085 153,131 196 1,661

92,210 185,553 37,027 313,788

Income before minority interests 64,808 37,973 81,057 686,924

Minority interests in income of

consolidated subsidiaries (15,104) (6,066) (12,512) (106,034)

Net income ¥ 49,704 ¥ 31,907 ¥ 68,545 $ 580,890

U.S. DollarsYen (Note 3)

Amounts per share of common stock:

Basic earnings (Note 17) ¥ 24.55 ¥ 15.42 ¥ 32.83 $ 0.278

Diluted earnings (Note 17) 22.24 13.86 29.54 0.250

Cash dividends 3.00 6.00 6.00 0.051




(millions) (Note 3)


Common stock:Balance at beginning of year ¥324,624 ¥324,624 ¥324,625 $2,751,059Conversion of bonds — 1 — —

Balance at end of year ¥324,624 ¥324,625 ¥324,625 $2,751,059

Capital surplus:Balance at beginning of year ¥519,720 ¥455,963 ¥497,882 $4,219,339Increase as a result of business acquisition — — 183 1,551Gain on sales of treasury stocks 16 12 7 59Increase as a result of stock exchange — 50,156 6 51Decrease as a result of deconsolidation ofconsolidated subsidiaries — — (59) (500)

Decrease as a result of deconsolidation ofequity method affiliates (63,773) (8,249) — —

Balance at end of year ¥455,963 ¥497,882 ¥498,019 $4,220,500

Retained earnings (Deficit):Balance at beginning of year ¥ (60,718) ¥ (35,734) ¥ (7,823) $ (66,297)Net income 49,704 31,907 68,545 580,890Decrease as a result of changesin accounting principles and practicesin UK subsidiaries (Note 1) — — (85,980) (728,644)

Cash dividends paid — (12,001) (12,408) (105,153)Bonuses to directors and statutory auditors (620) (620) (596) (5,051)Increase as a result of deconsolidation ofequity method affiliates — 7,961 — —

Decrease as a result of deconsolidation ofequity method affiliates (27,706) — — —

Other, net 3,606 664 (2,223) 18,838

Balance at end of year ¥ (35,734) ¥ (7,823) ¥ (40,485) $ (343,093)

Unrealized gains on securities, net of taxes:Balance at beginning of year ¥ 2,152 ¥149,629 ¥ 98,076 $ 831,153Increase (decrease) 147,477 (51,553) 81,638 691,847

Balance at end of year ¥149,629 ¥ 98,076 ¥179,714 $1,523,000

Revaluation surplus on land, net of taxes:Balance at beginning of year ¥ 3,938 ¥ 3,453 ¥ 3,453 $ 29,263Increase (decrease) (485) — (949) (8,043)

Balance at end of year ¥ 3,453 ¥ 3,453 ¥ 2,504 $ 21,220

Foreign currency translation adjustments:Balance at beginning of year ¥ (86,517) ¥ (69,901) ¥ (57,980) $ (491,356)Change during the period 16,616 11,921 12,113 102,653

Balance at end of year ¥ (69,901) ¥ (57,980) ¥ (45,867) $ (388,703)

Treasury stock:Balance at beginning of year ¥ (809) ¥ (857) ¥ (1,243) $ (10,534)(Increase) decrease (48) (386) (222) (1,881)

Balance at end of year ¥ (857) ¥ (1,243) ¥ (1,465) $ (12,415)


� Consolidated Statements of Shareholders’ EquityFujitsu Limited and Consolidated Subsidiaries

58 Fujitsu Limited


(millions) (Note 3)


Cash flows from operating activities (A):Income before income taxes and minority interests ¥ 157,018 ¥ 223,526 ¥ 118,084 $ 1,000,712Adjustments to reconcile income beforeincome taxes and minority interests tonet cash provided by operating activities:Depreciation and amortization, includinggoodwill amortization 292,949 232,118 242,376 2,054,034

Accrual (payments) for retirement benefits 22,923 7,269 4,906 41,576Provision for loss on repurchase of computers 33,329 21,746 27,003 228,839Reversal of provision for loss on repurchaseof computers (40,161) (33,494) (40,099) (339,822)

Interest and dividend income (6,668) (8,643) (10,495) (88,941)Interest charges 23,331 18,247 19,084 161,729Equity in earnings of affiliates, net 862 (3,691) 1,478 12,525Disposal of non-current assets 30,714 39,765 28,625 242,585Gain on transfer of substitutional portion ofemployees’ pension funds (146,532) — — —

Gain on sales of marketable securities (134,624) (133,299) — —(Increase) decrease in receivables, trade (101,803) (26,320) 10,719 90,839(Increase) decrease in inventories 42,637 37,965 5,746 48,695(Increase) decrease in other current assets 6,628 13,808 (836) (7,085)Increase (decrease) in payables, trade 158,327 (47,859) 21,196 179,627Increase (decrease) in other current liabilities 13,608 10,956 37,001 313,568Other, net 3,865 (35,757) (9,914) (84,017)

Cash generated from operations 356,403 316,337 454,874 3,854,864Interest received 2,763 4,638 5,814 49,271Dividends received 6,358 4,694 4,589 38,890Interest paid (24,142) (18,858) (20,302) (172,051)Income taxes paid (37,337) (29,579) (39,396) (333,864)

Net cash provided by (used in) operating activities 304,045 277,232 405,579 3,437,110

Cash flows from investing activities (B):Purchases of property, plant and equipment (141,596) (151,862) (221,100) (1,873,729)Proceeds from sales of property, plant and equipment 47,841 14,283 50,710 429,746Purchases of intangible assets (59,423) (47,677) (62,173) (526,890)Purchases of investment securities (47,205) (23,239) (70,981) (601,534)Proceeds from sales of investment securities 269,110 161,047 22,353 189,432Other, net (1,338) 32,319 46,507 394,128

Net cash provided by (used in) investing activities 67,389 (15,129) (234,684) (1,988,847)

A+B (*) 371,434 262,103 170,895 1,448,263

Cash flows from financing activities:Proceeds from long-term debt 57,150 126,179 38,477 326,076Repayment of long-term debt (197,876) (240,293) (150,628) (1,276,508)Increase (decrease) in short-term borrowings (76,741) (48,816) (44,503) (377,144)Increase (decrease) in minority interests 10,700 (1,024) (3,250) (27,542)Dividends paid — (12,001) (12,408) (105,153)Other, net (33,135) (36,079) (35,528) (301,085)

Net cash provided by (used in) financing activities (239,902) (212,034) (207,840) (1,761,356)Effect of exchange rate changes on cash andcash equivalents (3,199) 1,661 3,323 28,161

Net increase (decrease) in cash and cash equivalents 128,333 51,730 (33,622) (284,932)Cash and cash equivalents at beginning of year 282,333 413,826 454,516 3,851,830Cash and cash equivalents of newlyconsolidated subsidiaries 3,160 947 — —

Cash and cash equivalents of deconsolidated subsidiaries — (11,987) — —Cash and cash equivalents at end of year ¥ 413,826 ¥ 454,516 ¥ 420,894 $ 3,566,898

Non-cash investing and financing activities:Acquisition of assets under finance leases ¥ 32,084 ¥ 33,273 ¥ 55,149 $ 467,364Increase in capital surplus as aresult of stock exchange — 50,156 6 51

Contribution of assets to an affiliated company 63,949 — — —

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.(*) This is referred to as “free cash flow” in Management’s Discussion and Analysis of Operations.

� Consolidated Statements of Cash FlowsFujitsu Limited and Consolidated Subsidiaries


1. Significant Accounting Policies

(a) Basis of presenting consolidated financial statements and the principles of consolidationThe accompanying consolidated financial statements of Fujitsu Limited (the “Company”) and its con-solidated subsidiaries (together, the “Group”) have been prepared in accordance with the regulationsunder the Securities and Exchange Law of Japan and accounting principles and practices generally acceptedin Japan. The consolidated subsidiaries outside Japan have adopted the accounting principles and prac-tices in their respective countries. In presenting the accompanying consolidated financial statements, cer-tain items have been reclassified for the convenience of readers outside Japan.

Certain accounting principles and practices generally accepted in Japan are different from InternationalFinancial Reporting Standards (“IFRS”) and accounting principles and practices in other countries incertain respects as to applications and disclosure requirements. The differences between the accountingprinciples and practices adopted by the Group and those prescribed by IFRS are set forth in Note 2.

The consolidated financial statements include the accounts of the Company and, with minor exceptions,those of its majority-owned subsidiaries.

The acquisition of companies is accounted for by the purchase method. Goodwill represents theexcess of the acquisition cost over the fair value of the net assets of the acquired companies.

Investments in affiliates, with minor exceptions, are accounted for by the equity method.

<Changes in accounting principles and practices for the year ended March 31, 2006>For the year ended March 31, 2006, Fujitsu Services Holdings PLC, a UK subsidiary, and its consoli-dated subsidiaries (“FS”) have voluntarily adopted IFRS in line with listed companies in the EU.Prior to the adoption of IFRS, FS had been applying the accounting principles and practices generallyaccepted in the UK. The amounts in the consolidated financial statements prior to and for the year endedMarch 31, 2005, have not been restated.

The adoption of IFRS had the effect to decrease net sales by ¥5,032 million ($42,644 thousand) andincreased operating income and income before income taxes and minority interests by ¥6,109 million($51,771 thousand) and ¥5,192 million ($44,000 thousand), respectively. The impact of this change tothe segment information is set forth in Note 19.

For the year ended March 31, 2006, Fujitsu Telecommunications Europe Limited, another UK sub-sidiary recognized pension obligation which had not been recognized before in conformity with the newUK accounting standard for the retirement benefits (Financial Reporting Standard 17). The adoption ofthis standard, however, did not have a material impact on net income for the year ended March 31, 2006.

As a result of the above changes, cumulative effect as of April 1, 2005 of ¥85,980 million ($728,644thousand) had been charged to retained earnings (deficit).

(b) Cash equivalentsCash equivalents are considered to be short-term highly liquid investments with a maturity of three months orless from the date of acquisition and an insignificant risk of fluctuation in value.

(c) Translation of foreign currency accountsReceivables and payables denominated in foreign currencies are translated into Japanese yen at the for-eign currency exchange rates in effect at the respective balance sheet dates.

The assets and liabilities accounts of the consolidated subsidiaries outside Japan are translated into Japa-nese yen at the exchange rates in effect at the respective balance sheet dates. Income and expense accounts

� Notes to Consolidated Financial StatementsFujitsu Limited and Consolidated Subsidiaries

60 Fujitsu Limited

are translated at the average exchange rate during the year. The resulting translation adjustments are recordedin a separate component of shareholders’ equity as “foreign currency translation adjustments.”

(d) Revenue recognitionRevenue from sales of IT systems and products excluding customized software under development con-tracts (the “customized software”) is recognized upon acceptance by the customers, whereas, revenuefrom sales of personal computers, other equipment and electronic devices is recognized when the prod-ucts are shipped.

Revenue from sales of the customized software is recognized by reference to the percentage-of-completion method.

<Changes in accounting principles and practices for the year ended March 31, 2006>The Group changed the revenue recognition of the customized software from recognition at the time ofacceptance by the customers to the percentage-of-completion method for the year ended March 31, 2006.The amounts in the consolidated financial statements prior to and for the year ended March 31, 2005,have not been restated.

As a result of this change, sales and cost of sales increased ¥10,399 million ($88,127 thousand) and¥8,833 million ($74,856 thousand), respectively; operating income and income before income taxes andminority interests both increased ¥1,566 million ($13,271 thousand). The impact of this change to thesegment information is set forth in Note 19.

(e) Marketable securitiesMarketable securities included in “short-term investments” and “investments and long-term loans” areclassified as either held-to-maturity investments, which are the debt securities which the Group has thepositive intent and ability to hold to maturity, or available-for-sale securities, which are “equity securities”or “debt securities not classified as held-to-maturity.”

Held-to-maturity investments are stated at amortized cost, adjusted for the amortization of premiumor accretion of discounts to maturity. The cost of available-for-sale securities sold is calculated by themoving average method.

Available-for-sale securities are carried at fair market value, with the unrealized gains or losses, net oftaxes, reported in a separate component of shareholders’ equity.

(f) Allowance for doubtful accountsThe allowance for doubtful accounts is provided at an amount deemed sufficient to cover estimatedfuture losses.

(g) InventoriesFinished goods are mainly stated at cost determined by the moving average method.

Work in process is mainly stated at cost determined by the specific identification method or theaverage cost method.

Raw materials are mainly stated at cost determined by the moving average method or the most recentpurchase price method.

(h) Property, plant and equipment and depreciationProperty, plant and equipment, including renewals and additions, are carried at cost. Maintenance andrepairs, including minor renewals and improvements, are charged to income as incurred.


Depreciation is computed principally by the declining balance method at rates based on the estimateduseful lives of the respective assets, which vary according to their general classification, type of construc-tion and function.

Certain property, plant and equipment are impaired based on consideration of their future usefulness.Accumulated impairment loss is subtracted directly from each asset.

<Changes in accounting principles and practices for the year ended March 31, 2006>In Japan, the Group has adopted a new accounting standard, effective April 1, 2005, for impairment ofnon-current assets. The adoption of this standard, however, did not have a material impact on net incomefor the year ended March 31, 2006.

(i) Intangible assetsGoodwill is amortized by the straight-line method over periods not exceeding 20 years. In the consoli-dated financial statements, the Group consistently amortizes goodwill acquired by consolidated subsid-iaries outside Japan where goodwill is not amortized in accordance with the accounting principles andpractices in their respective countries.

Computer software for sale is amortized based on the current year sales units to the projected totalproducts’ sales units. Computer software for internal use is amortized by the straight-line method overthe estimated useful lives.

Other intangible assets are amortized by the straight-line method at the rates based on the estimateduseful lives of the respective assets.

(j) LeasesAssets acquired by lessees in finance lease transactions are recorded in the corresponding asset accounts.

(k) Provision for product warrantiesProvision for product warranties is provided at the time of sales of the products at an amount whichrepresents the estimated cost, based on past experience, to repair or exchange certain products within thewarranty period.

<Changes in accounting principles and practices for the year ended March 31, 2006>For the year ended March 31, 2006, the Group has started to provide for product warranties as notedabove in connection with increased sales of products under warranty and the increase in warranty relatedcosts. Prior to and for the year ended March 31, 2005, the Group had charged costs for repair or exchangeunder warranty to selling, general and administrative expenses at the time the warranty costs were incurred.The amounts in the consolidated financial statements prior to and for the year ended March 31, 2005,have not been restated.

In comparison with previous methods, the adoption of this policy represents a reduction in operatingincome of ¥3,029 million ($25,670 thousand) and, as a result of recording provision for prior productwarranties of ¥7,413 million ($62,822 thousand) as an expense in “other income (expenses),” a reductionof ¥10,442 million ($88,492 thousand) in income before income taxes and minority interests. The impactof this change to the segment information is set forth in Note 19.

(l) Retirement benefitsThe Company and the majority of the consolidated subsidiaries have retirement benefit plans.

Under the significant defined benefit plans, the actuarial valuation used to determine the pensioncosts is the projected unit credit method.

62 Fujitsu Limited

<Changes in accounting principles and practices for the year ended March 31, 2006>Certain consolidated subsidiaries outside Japan changed their accounting principles and practices onretirement benefits, for the year ended March 31, 2006. Details of this change are described in (a) Basis ofpresenting consolidated financial statements and the principles of consolidation and in Note 10.

(m) Provision for loss on repurchase of computersCertain computers manufactured by the Group are sold to Japan Electronic Computer Co., Ltd. (“JECC”)and other leasing companies for leasing to ultimate users under contracts which require the Group torepurchase the computers if they are returned by the users after a certain period. Based on past experi-ence, an estimated amount for the loss arising from such repurchases is provided at the point of sales andis charged to income.

(n) Income taxesThe Group has adopted the asset and liability method of tax effect accounting in order to recognizeincome tax effect of all temporary differences in the recognition of assets and liabilities for tax and finan-cial reporting purposes.

(o) Earnings per shareBasic earnings per share is computed based on the weighted average number of shares of common stockoutstanding during the respective years.

Diluted earnings per share is computed based on the weighted average number of shares after consid-eration of the dilutive effect of the shares of common stocks issuable upon the exercise of warrants and theconversion of convertible bonds.

(p) Derivative financial instrumentsThe Group uses derivative financial instruments for the purpose of hedging against the risk of fluctuationsin interest rates and foreign exchange rates on receivables and payables denominated in foreign currencies.

All derivative financial instruments are stated at fair market value.The Group defers gain or loss on changes in the fair market values of the derivative financial instru-

ments on the balance sheet until gain or loss on the hedged items are recognized.

2. Differences with International Financial Reporting Standards

A brief description of the material differences between IFRS and Japanese GAAP relevant to the Groupis set out below. The Group has not completed the assessment to identify or quantify the impact of allsuch differences. The description below is therefore prepared based on the Group’s current assessmentand consideration at March 31, 2006. Additionally, the Group has not made any attempts to identify orquantify any differences between IFRS and Japanese GAAP, which may result from changes in both oreither accounting principles and practices in the future.

This note is out of scope of the audit.

InventoriesUnder IAS 2, inventories should be stated at the lower of their historical cost or net realizable value. TheGroup evaluates inventories mainly at cost as indicated in Note 1. (g) Inventories. The effects on theaggregate value of inventories based on IAS 2 are not calculated. However, the Group takes into consid-eration the recoverability of inventories based on future business environments.


GoodwillUnder IFRS 3 “Business Combinations,” goodwill should not be amortized and IAS 36 “Impairment ofAssets” should be applied. The Group amortizes goodwill by the straight-line method over periods notexceeding 20 years as indicated in Note 1. (i) Intangible assets.

Retirement benefitsUnder IAS 19, the unrecognized net obligation upon the application of new accounting principles andpractices should be recognized immediately. The accounting principles and practices for this obligationare indicated in Note 10.

Scope of consolidationUnder IAS 27 and its interpretations SIC 12, Special Purpose Entities (SPEs) should be consolidated whenthe substance of the relationship between an entity and an SPE indicates that the entity controls the SPE.

The Company and its consolidated subsidiaries in Japan have not consolidated certain qualifyingSPEs in conformity with Japanese GAAP.

Uniformity of accounting policiesUnder IAS 27, unification of accounting policies for consolidated accounts is required. Under IAS 28,uniformity of accounting policies for affiliates is required as well.

Under Japanese GAAP, uniformity of accounting policies is required for similar transactions and eventsunder similar circumstances, in principle. However, it is permitted to use financial statements prepared inaccordance with local GAAP of foreign subsidiaries, unless the difference in accounting principles and prac-tices will lead to unreasonable consequences. The consolidated subsidiaries within the Group outside Japanhave adopted the accounting principles and practices in their respective countries as indicated in Note 1. (a)Basis of presenting consolidated financial statements and the principles of consolidation while some sub-sidiaries have adopted IFRS in countries where IFRS can be applied.

As a result of future revisions of IFRS or other effects, there is a possibility that certain differences mayarise for the accounting principles and practices that are not discussed above.

3. U.S. Dollar Amounts

The Company and its consolidated subsidiaries in Japan maintain their books of account in yen. TheU.S. dollar amounts included in the accompanying consolidated financial statements and the notes theretorepresent the arithmetic results of translating yen into U.S. dollars at ¥118 = US$1, the approximateexchange rate at March 31, 2006.

The U.S. dollar amounts are presented solely for the convenience of readers and the translation is notintended to imply that the assets and liabilities which originated in yen have been or could readily beconverted, realized or settled in U.S. dollars at the above or any other rate.

64 Fujitsu Limited

4. Marketable Securities

At March 31, 2005 and 2006, marketable securities included in “short-term investments” and “otherinvestments and long-term loans” were as follows:


At March 31 2005 2006 2006

Held-to-maturity investmentsCarrying value (Amortized cost) ¥ 1,414 ¥ 901 $ 7,635Market value 1,436 892 7,559

Net unrealized gain (loss) ¥ 22 ¥ (9) $ (76)

Available-for-sale securitiesAcquisition costs ¥ 62,158 ¥ 65,323 $ 553,585Carrying value (Market value) 228,429 369,039 3,127,449

Net unrealized gain (loss) ¥166,271 ¥303,716 $2,573,864

5. Inventories

Inventories at March 31, 2005 and 2006 consisted of the following:


At March 31 2005 2006 2006

Finished goods ¥186,555 ¥180,656 $1,530,983Work in process 211,090 142,673 1,209,093Raw materials 80,865 85,381 723,568

¥478,510 ¥408,710 $3,463,644

6. Investments in Affiliates

The Company accounts for investments in affiliates by the equity method with minor exceptions.A summary of the financial information of the affiliates accounted for by the equity method is pre-

sented below:


At March 31 2005 2006 2006

Current assets ¥585,081 ¥ 813,649 $ 6,895,330Non-current assets 392,281 598,677 5,073,534

977,362 1,412,326 11,968,864

Current liabilities 604,384 778,905 6,600,890Long-term liabilities 224,153 238,405 2,020,381

Net assets ¥148,825 ¥ 395,016 $ 3,347,593



Net sales ¥1,393,351 ¥1,603,931 ¥1,774,230 $15,035,847Net income (loss) 39,994 45,934 (16,235) (137,585)


Decrease in net income (loss) for the year ended March 31, 2006 mainly consisted of thedeconsolidation of Advantest Corporation due to sales of its shares for the year ended March 31, 2005,and the expansion of net loss of Spansion Inc. for the year ended March 31, 2006.

The carrying and market values of the shares of the publicly listed equity method affiliates at March31, 2005 and 2006 were as follows:


At March 31 2005 2006 2006

Carrying value ¥ 9,838 ¥65,261 $553,059

Market value 30,465 88,286 748,186

Carrying value and Market value at March 31, 2006, mainly consisted of increase due to the listingof Spansion Inc. on the NASDAQ exchange.

After the shares in Advantest Corporation were sold for the year ended March 31, 2005, AdvantestCorporation was no longer treated as an equity method affiliate.

At March 31, 2005 and 2006, the amount of ¥19,373 million ($164,178 thousand) representing theCompany’s 29.49% investment in JECC was included in “other investments and long-term loans.” TheCompany does not regard JECC as an affiliate as it is unable to exercise significant influence over JECC’saffairs. JECC’s principal business is the leasing of computers and peripherals purchased from its six share-holders. At March 31, 2005 and 2006, JECC’s issued share capital was ¥65,700 million ($556,780 thou-sand). Its net sales for the years ended March 31, 2004, 2005 and 2006 amounted to ¥303,285 million,¥304,482 million and ¥299,993 million ($2,542,314 thousand), respectively.

7. Property, Plant and Equipment

Changes in property, plant and equipment resulted from the following:


Years ended March 31 2005 2006 2006

Land

Balance at beginning of year, net ¥134,217 ¥115,606 $ 979,712

Additions 32 276 2,339

Translation differences 113 414 3,508

Other, net (18,756) (3,235) (27,415)

Balance at end of year, net ¥115,606 ¥113,061 $ 958,144

Buildings

Balance at beginning of year, net ¥276,259 ¥254,677 $2,158,280

Additions 16,487 43,348 367,356

Depreciation 24,531 26,258 222,526

Translation differences 707 2,277 19,297

Other, net (14,245) (2,621) (22,212)

Balance at end of year, net ¥254,677 ¥271,423 $2,300,195

66 Fujitsu Limited

“Other, net” for the year ended March 31, 2005 mainly consisted of decrease due to the transfer of ourplasma display panel business and the shifting of compound semiconductor device business subsidiar-ies from consolidated subsidiaries to equity method affiliates.



Machinery and equipment

Balance at beginning of year, net ¥372,679 ¥327,626 $2,776,491

Additions 159,816 199,530 1,690,932

Depreciation 146,699 147,587 1,250,737

Translation differences 1,608 2,570 21,780

Other, net (59,778) (25,320) (214,576)

Balance at end of year, net ¥327,626 ¥356,819 $3,023,890

“Other, net” for the year ended March 31, 2005 mainly consisted of decrease due to the transfer of ourplasma display panel business and the shifting of compound semiconductor device business subsidiar-ies from consolidated subsidiaries to equity method affiliates.



Construction in progress

Balance at beginning of year, net ¥ 19,868 ¥ 29,991 $ 254,161

Additions 121,599 175,689 1,488,890

Translation differences 13 12 101

Transfers (111,489) (170,019) (1,440,839)

Balance at end of year, net ¥ 29,991 ¥ 35,673 $ 302,313

8. Goodwill

An analysis of goodwill is presented below:



Balance at beginning of year ¥66,045 ¥81,569 $691,263

Additions 25,564 18,776 159,119

Amortization 11,626 15,372 130,271

Translation differences 1,586 277 2,347

Balance at end of year ¥81,569 ¥85,250 $722,458


9. Short-Term Borrowings and Long-Term Debt

Short-term borrowings at March 31, 2005 and 2006 consisted of the following:


At March 31 2005 2006 2006

Loans, principally from banks, with weighted average interest rates

of 1.27% at March 31, 2005 and 2.07% at March 31, 2006:

Secured ¥ 600 ¥ 760 $ 6,440

Unsecured 101,479 63,060 534,407

¥102,079 ¥63,820 $540,847

Long-term debt at March 31, 2005 and 2006 consisted of the following:


At March 31 2005 2006 2006

Loans, principally from banks and insurance companies,

due 2005 to 2020 with the weighted average interest rate of

1.81% at March 31, 2005 and


1.85% at March 31, 2006:

Secured ¥ 662 ¥ 462 $ 3,915

Unsecured 173,522 84,131 712,974

Bonds and notes issued by the Company:

Zero coupon unsecured convertible bonds due 2009 250,000 250,000 2,118,644

2.875% unsecured bonds due 2006 50,000 50,000 423,729










Bonds and notes issued by consolidated subsidiaries,


1.35% at March 31, 2005 and

due 2011 with the weighted average interest rate of

2.00% at March 31, 2006:

Unsecured 26,525 200 1,695

Less amounts due within one year (107,474) (171,028) (1,449,390)

¥ 873,235 ¥ 693,765 $ 5,879,364

68 Fujitsu Limited

At March 31, 2006, the Group had committed line contracts with banks aggregating ¥207,850 mil-lion ($1,761,441 thousand). Of the total credit limit, ¥32,773 million ($277,737 thousand) was used asthe above short-term and long-term borrowings and the rest, ¥175,077 million ($1,483,704 thousand),was unused.

The current conversion price of the zero coupon convertible bonds issued by the Company is ¥1,201.00per share. Each conversion price is subject to adjustment in certain circumstances, including stock splitsor free share distributions of common stock. At March 31, 2006, the convertible bonds were convertibleinto approximately 208 million shares of common stock.

Certain outstanding convertible bonds and notes can be repurchased at any time and may be redeemedat the option of the Company, in whole or in part, at 100% of their principal amounts.

The aggregate annual maturities of long-term debt subsequent to March 31, 2006 are summa-rized as follows:

Yen U.S. DollarsYears ending March 31 (millions) (thousands)

2007 ¥171,028 $1,449,390

2008 186,352 1,579,254

2009 102,067 864,975

2010 303,379 2,571,008

2011 and thereafter 101,967 864,127

Convertible bonds are treated solely as liabilities and value inherent in their conversion feature is notrecognized as equity in accordance with accounting principles and practices generally accepted in Japan.The total amount of the convertible bonds has been included in “long-term debt.”

Assets pledged as collateral for short-term borrowings and long-term debt at March 31, 2005 and2006 are principally presented below:


At March 31 2005 2006 2006

Property, plant and equipment, net ¥3,057 ¥2,790 $23,644

As is customary in Japan, substantially all loans from banks (including short-term loans) are madeunder general agreements which provide that, at the request of the banks, the borrower is required toprovide collateral or guarantors (or additional collateral or guarantors, as appropriate) with respect tosuch loans, and that all assets pledged as collateral under such agreements will be applicable to all presentand future indebtedness to the banks concerned. These general agreements further provide that the bankshave the right, as the indebtedness matures or becomes due prematurely by default, to offset deposits atthe banks against the indebtedness due to the banks.


10. Retirement Benefits

The Company and the majority of the consolidated subsidiaries in Japan have unfunded lump-sumretirement plans which, in general, cover all employees who retire before a retirement age prescribed intheir internal codes. The employees are entitled to the benefits primarily based on their length of serviceand basic salary as of the retirement date.

In addition, the Company and the majority of the consolidated subsidiaries in Japan participate incontributory defined benefit plans which cover substantially all employees. The major contributory definedbenefit plan (the “Plan”), which is referred to as the Fujitsu Corporate Pension Fund, entitles employeesupon retirement at the normal retirement age to either a lump-sum payment or pension annuity pay-ments for life commencing at age 60, or a combination of both based on their length of service, basicsalary as of the retirement date and the number of years of participation in the Plan. The contributions ofthe Company and the subsidiaries covered by the Plan and their employees are made to the FujitsuCorporate Pension Fund which is an external organization.

The Fujitsu Welfare Pension Fund, which the Company and certain consolidated subsidiaries inJapan participated in, received approval of an elimination of the future benefit obligations of the substitu-tional portion on March 23, 2004, and then received approval of transfer of past benefit obligation of thesubstitutional portion on September 1, 2005, from the Minister of Health, Labour and Welfare. Accord-ingly, Fujitsu Welfare Pension Fund changed to the Defined Benefit Corporate Plan based on the Japa-nese Defined Benefit Corporate Pension Law, from the Japanese Welfare Pension Plan based on theJapanese Welfare Pension Insurance Law, and concurrently a part of the pension system was revised.

The majority of the consolidated subsidiaries outside Japan have defined benefit plans and/or definedcontribution plans covering substantially all their employees. The major defined benefit pension planprovided outside Japan is the plan that Fujitsu Services Holdings PLC (including its consolidated sub-sidiaries, “FS”) provides. The plan entitles employees payments based on their length of service andsalary. The defined benefit section of the plan was closed to new entrants on August 31, 2000. New employeesare, however, eligible for membership of the defined contribution section.

The balances of the “projected benefit obligation and plan assets” and the “components of net periodicbenefit cost” in the plans in both Japan and outside Japan are summarized as follows:

<In Japan>Projected benefit obligation and plan assets


At March 31 2005 2006 2006

Projected benefit obligation ¥(1,247,141) ¥(1,054,075) $(8,932,839)

Plan assets 876,758 1,122,751 9,514,839

Projected benefit obligation in excess of plan assets (370,383) 68,676 582,000

Unrecognized net obligation at transition 81,653 65,264 553,085

Unrecognized actuarial loss 314,353 47,585 403,263

Unrecognized prior service cost (reduced obligation) (593) (176,712) (1,497,560)

Prepaid pension cost (110,777) (89,847) (761,415)

Accrued retirement benefits ¥ (85,747) ¥ (85,034) $ (720,627)

70 Fujitsu Limited

As a result of pension system revisions, Fujitsu Corporate Pension Fund which the Company andcertain consolidated subsidiaries participate in reported unrecognized prior service cost (reduced obliga-tion) at September 1, 2005.

Components of net periodic benefit cost



Service cost ¥ 53,613 ¥ 49,892 ¥ 40,751 $ 345,347

Interest cost 48,004 29,511 28,133 238,415

Expected return on plan assets (36,125) (30,733) (28,419) (240,839)

Amortization of unrecognized obligation

for retirement benefits:

Amortization of net obligation at transition 25,435 16,691 16,228 137,526

Amortization of actuarial loss 39,578 22,609 22,943 194,432

Amortization of prior service cost (8,070) (5) (10,957) (92,856)

Net periodic benefit cost ¥ 122,435 ¥ 87,965 ¥ 68,679 $ 582,025

Gain on transfer of substitutional portion

of employees’ pension funds (146,532) — — —

Total ¥ (24,097) ¥ 87,965 ¥ 68,679 $ 582,025

Applying the transitional provisions as prescribed in paragraph 47-2 of “Practical Guidelines ofAccounting and Retirement Benefits-Interim Report” (Accounting Committee Report No.13 issued bythe Japanese Institute of Certified Public Accountants), the Company and certain consolidated subsid-iaries in Japan accounted for the elimination of the future and past benefit obligations of the substitu-tional portion as well as the related government-specified portion of the employees’ pension plan assets atthe date of the approval made in the year ended March 31, 2004.

The assumptions used in accounting for the plans

At March 31 2005 2006

Discount rate 2.5% 2.5%

Expected rate of return on plan assets 3.8% 3.2%

Method of allocating actuarial loss Straight-line method over Straight-line method over

the employees’ average remaining the employees’ average remaining

service period service period

Method of allocating prior service cost Straight-line method over 10 years Straight-line method over 10 years

Amortization period for net obligation

at transition 10 years 10 years

For the year ended March 31, 2001, the Company fully recognized in income its portion of the unrec-ognized net obligation at transition. For additional plan assets to cover the unrecognized net obligation attransition, the Company placed its holding of marketable securities in trust which was solely establishedfor the retirement benefit plan.


<Outside Japan>FS adopted International Financial Reporting Standards (“IFRS”) for the year ended March 31,2006, and accounts for retirement benefits in accordance with IAS 19 “Employee Benefits.” For thischange in accounting principles and practices, FS adopted IFRS 1 “First-time Adoption of InternationalFinancial Reporting Standards,” and recognized the projected benefit obligation in excess of plan assetsas of April 1, 2004 which is the beginning of the prior year of the IFRS adoption. FS recognized actuarialgain or loss over future periods after the adoption of IFRS 1.

From the year ended March 31, 2006, Fujitsu Telecommunications Europe Limited (“FTEL”), aconsolidated subsidiary in the UK, recognized the full value of the unrecognized obligation immediatelyas accrued retirement benefits, in accordance with a new UK accounting standard for the retirementbenefits (Financial Reporting Standard 17).(NOTE) Guidelines of changes in accounting principles and practices in FS and FTEL are set previously in Note 1. (a) Basis of presenting consoli-

dated financial statements and the principles of consolidation.

Projected benefit obligation and plan assets


At March 31 2006 2006

Projected benefit obligation ¥(597,236) $(5,061,322)

Plan assets 448,619 3,801,856

Projected benefit obligation in excess of plan assets (148,617) (1,259,466)

Unrecognized actuarial loss 31,924 270,542

Accrued retirement benefits ¥(116,693) $ (988,924)

Components of net periodic benefit cost


Year ended March 31 2006 2006

Service cost ¥ 8,205 $ 69,534

Interest cost 27,436 232,509

Expected return on plan assets (25,370) (215,000)

Amortization of the unrecognized obligation for retirement benefit:

Amortization of actuarial loss 81 686

Net periodic benefit cost ¥ 10,352 $ 87,729

FS applied the “corridor” approach to amortization of actuarial loss.

The assumptions used in accounting for the plans

At March 31 2006

Discount rate Mainly 5.1%

Expected rate of return on plan assets Mainly 7.3%

Method of allocating actuarial loss Straight-line method over

the employees’ average remaining service period

72 Fujitsu Limited

11. Income Taxes

The Group is subject to a number of different income taxes. The statutory tax rates in the aggregate in Japanwere approximately 42.0% for the year ended March 31, 2004, and approximately 40.6% for the years endedMarch 31, 2005 and 2006.

The components of income taxes are as follows:



Current ¥34,125 ¥ 32,422 ¥36,831 $312,127

Deferred 58,085 153,131 196 1,661

Income taxes ¥92,210 ¥185,553 ¥37,027 $313,788

The reconciliations between the applicable statutory income tax rate and the effective income tax ratefor the years ended March 31, 2004, 2005 and 2006 are as follows:


Statutory income tax rate 42.0% 40.6% 40.6%

Increase (Decrease) in tax rate:

Tax effect on prior losses on investments in

equity method affiliates — — (9.4%)

Amortization of goodwill 8.1% 2.1% 5.3%

Valuation allowance for deferred tax assets 53.2% 45.7% (3.4%)

Non-deductible expenses for tax purposes 1.7% 1.3% 2.3%

Non-taxable income (0.6%) (0.5%) (0.8%)

Tax effect on equity in earnings of

affiliates, net (1.1%) (1.7%) 0.5%

Adjustment of net gain on sale of investments

in subsidiaries and affiliated companies 26.6% (2.3%) —

Tax effect on prior losses on investments

in subsidiaries (72.5%) — —

Other 1.3% (2.2%) (3.7%)

Effective income tax rate 58.7% 83.0% 31.4%


The significant components of deferred tax assets and liabilities at March 31, 2005 and 2006were as follows:


At March 31 2005 2006 2006

Deferred tax assets:

Tax loss carryforwards ¥ 271,554 ¥ 231,784 $ 1,964,271

Accrued retirement benefits 139,585 169,908 1,439,898

Accrued bonus 36,854 40,265 341,229

Provision for loss on repurchase of computers 17,607 14,186 120,220

Intercompany profit on inventory and

property, plant and equipment 6,417 5,452 46,204

Other 67,811 67,179 569,314

Gross deferred tax assets 539,828 528,774 4,481,136

Less: Valuation allowance (289,910) (243,463) (2,063,246)

Total deferred tax assets 249,918 285,311 2,417,890

Deferred tax liabilities:

Unrealized gains on securities ¥ (67,457) ¥(123,270) $(1,044,661)

Gains from establishment of stock holding trust

for retirement benefit plan (110,617) (110,617) (937,432)

Retained earnings appropriated for tax allowable reserves (8,942) (8,523) (72,229)

Other (548) (578) (4,899)

Total deferred tax liabilities (187,564) (242,988) (2,059,221)

Net deferred tax assets ¥ 62,354 ¥ 42,323 $ 358,669

Net deferred tax assets were included in the consolidated balance sheets as follows:


At March 31 2005 2006 2006

Other current assets ¥ 75,515 ¥ 79,244 $ 671,559

Other investments and long-term loans 40,085 63,400 537,288

Other current liabilities (690) (520) (4,407)

Other long-term liabilities (52,556) (99,801) (845,771)

Net deferred tax assets ¥ 62,354 ¥ 42,323 $ 358,669

The Company and the wholly owned subsidiaries in Japan have adopted the consolidated tax returnsystem of Japan.

Tax losses can be carried forward up to 7 years in Japan, 20 years in the United States, and indefi-nitely in the United Kingdom. Realization depends on the abilities of the companies to generate suffi-cient taxable income prior to the expiration of the tax loss carryforwards. With respect to deferred taxassets, we recorded a valuation allowance to cover the amount in excess of what we are likely to recover inthe future.

Deferred tax liabilities have not been provided on the undistributed profit of affiliates, as it is deemedthat any distributions will not give rise to tax liabilities.

74 Fujitsu Limited

12. Shareholders’ Equity

The changes in the number of issued shares of common stock for the years ended March 31, 2004,2005 and 2006 were as follows:

Number of shares


Balance at beginning of year 2,001,962,672 2,001,962,672 2,070,018,213

Conversion of convertible bonds — 1,141 —

Increase as a result of stock exchange — 68,054,400 —

Balance at end of year 2,001,962,672 2,070,018,213 2,070,018,213

An increase as a result of stock exchange for the year ended March 31, 2005 reflected the issuance ofshares in October 2004 by which the Company turned Fujitsu Support and Service Inc. into a whollyowned subsidiary.

13. Commitments and Contingent Liabilities

Commitments outstanding at March 31, 2006 for purchases of property, plant and equipment wereapproximately ¥15,496 million ($131,322 thousand).

Contingent liabilities for guarantee contracts amounted to ¥40,092 million ($339,763 thousand) atMarch 31, 2006. Of the total contingent liabilities, guarantees given mainly for bank loans taken by FDKCorporation, an equity method affiliate of the Company, were ¥13,300 million ($112,712 thousand) andfor employees’ housing loans were ¥8,219 million ($69,653 thousand).

14. Derivative Financial Instruments

Purpose of Derivative TradingThe Group enters into derivative transactions related to foreign currency exchange rates and interestrates in order to reduce risk exposure arising from fluctuations in these rates, to reduce the cost of thefunds financed, and to improve return on invested funds.

Basic Policies for Derivative TradingThe Group basically enters into derivative transactions only to cover actual requirements for the effectivemanagement of receivables/liabilities, and not for speculative or dealing purposes.

The Group, in principle, has no intention to use derivative financial instruments that would increasemarket risks. Furthermore, the counterparties to the derivative transactions are thoroughly assessed interms of their credit risks. Therefore, the Group believes that its derivative financial instruments entailminimal market and credit risks.

Control of Derivative TradingThe Group enters into derivative transactions based on regulations established by the Company, andcontrols the risk of the transaction by assessing the efficiency of its hedging.


Hedge AccountingThe Group adopts hedge accounting for its derivative transactions.

Gains or losses on changes in the fair market values of the hedging instruments, which consist offorward exchange, option and swap contracts and related complex contracts, are recognized in incomewhen the relating hedged items are reflected in income.

Fair Value of Derivative Financial Instruments:At March 31, 2005 and 2006, all derivative financial instruments were stated at fair market value andrecorded on the balance sheets.

15. Leases

The following is a summary of equivalent amounts of acquisition cost, accumulated depreciation, bookvalue of leased assets, and minimum lease payments required under finance leases, which were recordedin the corresponding asset accounts, at March 31, 2005 and 2006.


At March 31 2005 2006 2006

Equivalent amounts of acquisition cost ¥163,712 ¥198,400 $1,681,356

Accumulated depreciation 102,974 117,607 996,670

Book value of leased assets 60,738 80,793 684,686

Minimum lease payments required

Within one year 23,486 29,623 251,042

Over one year but within five years 42,002 60,545 513,093

Over five years 2,133 16,355 138,602

Total ¥ 67,621 ¥106,523 $ 902,737

The following is a summary of future minimum lease payments required under non-cancelable oper-ating leases in the aggregate and for each of the following periods.


At March 31 2005 2006 2006

Within one year ¥10,766 ¥ 9,554 $ 80,966

Over one year but within five years 28,961 23,730 201,102

Over five years 18,843 14,415 122,161

Total ¥58,570 ¥47,699 $404,229

76 Fujitsu Limited

16. Supplementary Information to the Consolidated Balance Sheets

Receivables, trade from and payables, trade to affiliates at March 31, 2005 and 2006 were as follows:


At March 31 2005 2006 2006

Receivables, trade ¥36,847 ¥42,816 $362,847

Payables, trade 64,038 85,332 723,153

Provision for product warranties included in “Other current liabilities” at March 31, 2005 and 2006were as follows:


At March 31 2005 2006 2006

Provision for product warranties ¥6,456 ¥16,993 $144,008

Provision for product warranties at March 31, 2005 was related to certain products of consoli-dated subsidiaries.

17. Earnings Per Share



Net income ¥49,704 ¥31,907 ¥68,545 $580,890

Bonuses to directors and statutory auditors

from retained earnings (deficit) (596) (548) (658) (5,576)

Net income for common stock shareholders 49,108 31,359 67,887 575,314

Effect of dilutive securities (1) 29 (648) (5,492)

Diluted net income ¥49,107 ¥31,388 ¥67,239 $569,822

thousands

Weighted average number of shares 2,000,366 2,034,114 2,067,787

Effect of dilutive securities 208,159 230,778 208,159

Diluted weighted average number of shares 2,208,525 2,264,892 2,275,946

Yen U.S. Dollars

Basic earnings per share ¥24.55 ¥15.42 ¥32.83 $0.278

Diluted earnings per share 22.24 13.86 29.54 0.250


18. Supplementary Information to the Consolidated Statements of Operations

Research and development expenses charged to “selling, general and administrative expenses” for theyears ended March 31, 2004, 2005 and 2006 were ¥250,910 million, ¥240,222 million and ¥241,566 million($2,047,169 thousand), respectively.

“Other income (expenses)—other, net” for the years ended March 31, 2004, 2005 and 2006 con-sisted of the following:



Settlement gain ¥ — ¥ — ¥ 15,957 $ 135,229

Gain on business transfer — 36,534 3,455 29,280

Gain on sales of marketable securities 134,624 133,299 — —

Gain on transfer of substitutional portion of

employees’ pension funds 146,532 — — —

Gain on sales of property, plant and equipment 13,649 — — —

Amortization of unrecognized obligation for

retirement benefits (56,943) (39,295) (28,214) (239,102)

Restructuring charges (164,202) (20,085) (11,559) (97,958)

Loss on disposal of property,

plant and equipment (7,142) (7,668) (7,229) (61,263)

Loss on change in interest — — (8,413) (71,297)

Provision for prior product warranties — — (7,413) (62,822)

Real estate valuation losses — (15,274) — —

HDD litigation-related expenses (10,220) — — —

Casualty loss (4,700) — — —

Foreign exchange gains (losses), net (6,972) 2,174 5,803 49,178

Other, net (20,425) (20,437) (15,724) (133,254)

¥ 24,201 ¥ 69,248 ¥(53,337) $(452,009)

Settlement gainSettlement gain for the year ended March 31, 2006 related to the reconciliation of HDD litigation.

Gain on business transferGain on business transfer for the year ended March 31, 2005 related to the transfer of the plasma displaypanel business.

Gain on business transfer for the year ended March 31, 2006 related to the transfer of LCDpanel operations.

Gain on sales of marketable securitiesGain on sales of marketable securities for the year ended March 31, 2004 related mainly to the sales of sharesin Fanuc Ltd.

Gain on sales of marketable securities for the year ended March 31, 2005 related mainly to the sales ofshares in Fanuc Ltd. and Advantest Corporation.

78 Fujitsu Limited

Gain on transfer of substitutional portion of employees’ pension fundsPlease refer to Note 10 for “gain on transfer of substitutional portion of employees’ pension funds” forthe year ended March 31, 2004.

Gain on sales of property, plant and equipmentGain on sales of property, plant and equipment for the year ended March 31, 2004 related to securitizationof the land and buildings of Fujitsu Solution Square (located in Kamata, Tokyo), and the sales of otherproperties that had been used for employees’ welfare.

Amortization of unrecognized obligation for retirement benefitsAmortization of unrecognized obligation for retirement benefits related mainly to amortization of actu-arial loss in Japan and net obligation at transition for the consolidated subsidiaries in Japan.

Restructuring chargesRestructuring charges for the year ended March 31, 2004 related to the cost of ¥75,775 million for reductionin force, disposal of assets and one-time amortization of goodwill with regard to global restructuring focus-ing on North America, the expected loss of ¥68,316 million based on strict analysis of predicted futurereturns with regard to fundamental reform of the Software & Services business in Japan, and other costs of¥20,111 million for reduction in force and disposal of assets with regard to restructuring of subsidiaries.

Restructuring charges for the year ended March 31, 2005 were recorded as expenses relating to reduc-tions and relocation of personnel and disposition of assets primarily at domestic manufacturing subsidiaries.

Restructuring charges for the year ended March 31, 2006 related to expenses of restructuring to improvebusiness profitability and asset efficiency, realignment of business location, etc.

Loss on change in interestLoss on change in interest for the year ended March 31, 2006 refers to loss relating to allocation of newshares of affiliate (Spansion Inc.) to third parties.

Provision for prior product warrantiesProvision for prior product warranties for the year ended March 31, 2006 is related to provision to coverwarranty-related costs for products sold in prior fiscal years.

Real estate valuation lossesReal estate valuation losses for the year ended March 31, 2005 related to the devaluation on idleproperty holdings.

HDD litigation-related expensesHDD litigation-related expenses for the year ended March 31, 2004 included expenses related to the settle-ment of a class-action lawsuit in the United States regarding certain Fujitsu-manufactured magnetic harddisk drives, as well as other litigation-related expenses and expenses for corrective measures for customers.

Casualty lossCasualty loss for the year ended March 31, 2004 related to repair expenses incurred to cover damageto property as a result of the earthquake that occurred off the coast of Miyagi Prefecture, Japan, on May26, 2003.


19. Segment Information

Business Segment Information

Yen (millions)

UbiquitousTechnology Product Other Elimination &

Years ended March 31 Solutions Solutions Device Solutions Operations Corporate Consolidated

2004

Sales

Unaffiliated customers ¥2,847,798 ¥ 834,256 ¥734,320 ¥350,514 ¥ — ¥4,766,888

Intersegment 80,522 114,239 70,365 115,598 (380,724) —

Total sales 2,928,320 948,495 804,685 466,112 (380,724) 4,766,888

Operating costs and expenses 2,789,314 916,552 777,147 453,708 (320,175) 4,616,546

Operating income (loss) 139,006 31,943 27,538 12,404 (60,549) 150,342

Total assets 1,828,260 328,865 749,552 480,133 478,779 3,865,589

Depreciation 123,191 27,631 84,924 14,335 11,724 261,805

Capital expenditure

(including intangible assets) 120,020 16,411 62,793 10,023 9,235 218,482

2005

Sales


Intersegment 74,059 132,415 60,931 107,693 (375,098) —

Total sales 2,934,418 1,031,415 794,797 377,227 (375,098) 4,762,759

Operating costs and expenses 2,792,336 1,000,088 762,215 368,181 (320,252) 4,602,568


Total assets 1,808,630 338,585 672,146 498,557 322,280 3,640,198

Depreciation 104,324 23,300 69,686 11,029 12,153 220,492

Capital expenditure


2006

Sales


Intersegment 80,291 133,506 52,398 141,147 (407,342) —

Total sales 2,983,942 1,059,923 707,537 447,356 (407,342) 4,791,416

Operating costs and expenses 2,819,717 1,025,461 674,237 439,647 (349,134) 4,609,928


Total assets 1,811,796 335,548 670,832 471,283 517,672 3,807,131

Depreciation 113,525 21,539 68,124 12,141 11,675 227,004

Capital expenditure


80 Fujitsu Limited

U.S. Dollars (thousands)

Ubiquitous

Technology Product Other Elimination &Years ended March 31 Solutions Solutions Device Solutions Operations Corporate Consolidated

2006 (in U.S. Dollars)

Sales

Unaffiliated customers $24,607,212 $7,850,991 $5,552,025 $2,594,992 $ — $40,605,220

Intersegment 680,432 1,131,407 444,051 1,196,161 (3,452,051) —

Total sales 25,287,644 8,982,398 5,996,076 3,791,153 (3,452,051) 40,605,220

Operating costs and expenses 23,895,907 8,690,347 5,713,873 3,725,822 (2,958,763) 39,067,186

Operating income (loss) 1,391,737 292,051 282,203 65,331 (493,288) 1,538,034

Total assets 15,354,203 2,843,627 5,685,017 3,993,924 4,387,051 32,263,822

Depreciation 962,076 182,534 577,322 102,890 98,941 1,923,763

Capital expenditure

(including intangible assets) 1,313,009 199,000 1,018,932 127,678 102,737 2,761,356

1. The business segments are classified based on similarity of products and services, and selling methods, etc.2. Changes in business segments

The Group has been integrating its sales and system engineering groups and pursuing other organizational reforms to make its structure moreefficient, since the year ended March 31, 2005.

In light of the development of these ongoing organizational reforms, the Group has reclassified its business segments as: Technology Solutions,Ubiquitous Product Solutions, Device Solutions, and Other Operations, in consideration of the similarities in particular product and service offeringsand sales methods, from the year ended March 31, 2006.

Segment information prior to and for the year ended March 31, 2005 has been restated.3. The principal products and services of business segments are as follows:

(1) Technology Solutions ............... Servers (mainframes, UNIX servers, mission-critical IA servers, PC servers), storage system, software (OS,middleware), network control system, optical transmission systems, mobile base station, consulting, systemintegration services (system construction), outsourcing services (one-stop information system operational man-agement), network services (network environments and networking-related services for information systems),system support (information system and network maintenance and monitoring services), information systeminstallation, network construction, custom terminal installation (ATMs, POS systems)

(2) Ubiquitous Product Solutions ... Personal computers, mobile phones, HDD (compact magnetic drives), magneto-optical drives, optical modules(3) Device Solutions ....................... LSI (logic LSI devices, flash memory), electronic components (semiconductor packages, SAW devices),

mechanical components (relays, connectors, etc)(4) Other Operations ...................... Audio/navigation equipment, automotive electronic devices

4. Unallocated operating costs and expenses included in “Elimination & Corporate” for the years ended March 31, 2004, 2005 and 2006 were ¥61,032million, ¥58,324 million and ¥56,150 million ($475,847 thousand), respectively. Most of these costs and expenses were incurred as basic researchand development expenses and general and administrative expenses at the Company.

5. Corporate assets included in “Elimination & Corporate” at March 31, 2004, 2005 and 2006 amounted to ¥955,034 million, ¥927,300 million and¥932,190 million ($7,899,915 thousand), respectively. The assets principally consisted of working capital (cash and cash equivalents and short-terminvestments), long-term investments and miscellaneous assets held by the general and administrative sections at the Company.

6. Accounting principles and practices were changed from the year ended March 31, 2006 as stated in Note 1. (a) Basis of presenting consolidatedfinancial statements and the principles of consolidation (d) Revenue recognition (k) Provision for product warranties. As a result of these changes,sales to unaffiliated customers and operating income for “Technology Solutions” increased by ¥5,367 million ($45,483 thousand) and ¥7,785 million($65,975 thousand), respectively, and operating income for “Ubiquitous Product Solutions” decreased by ¥2,977 million ($25,229 thousand).


Geographic Segment Information

Yen (millions)

Elimination &

Years ended March 31 Japan Europe The Americas Others Corporate Consolidated

2004

Sales

Unaffiliated customers ¥3,605,665 ¥544,593 ¥254,488 ¥362,142 ¥ — ¥4,766,888

Intersegment 465,811 18,768 20,210 217,037 (721,826) —

Total sales 4,071,476 563,361 274,698 579,179 (721,826) 4,766,888


Operating income (loss) 203,733 6,686 (13,161) 13,504 (60,420) 150,342

Total assets 2,411,533 347,871 226,122 206,993 673,070 3,865,589

2005

Sales


Intersegment 463,593 11,764 16,959 268,154 (760,470) —

Total sales 4,024,518 596,902 298,918 602,891 (760,470) 4,762,759



Total assets 2,178,392 357,883 177,941 215,058 710,924 3,640,198

2006

Sales


Intersegment 513,959 9,198 19,382 325,314 (867,853) —

Total sales 3,944,401 632,542 363,476 718,850 (867,853) 4,791,416



Total assets 2,303,223 378,108 163,144 249,534 713,122 3,807,131

U.S. Dollars (thousands)

2006 (in U.S. Dollars)

Sales

Unaffiliated customers $29,071,542 $5,282,576 $2,916,051 $3,335,051 $ — $40,605,220

Intersegment 4,355,585 77,949 164,254 2,756,898 (7,354,686) —

Total sales 33,427,127 5,360,525 3,080,305 6,091,949 (7,354,686) 40,605,220

Operating costs and expenses 31,852,195 5,166,033 2,965,263 5,965,517 (6,881,822) 39,067,186

Operating income (loss) 1,574,932 194,492 115,042 126,432 (472,864) 1,538,034

Total assets 19,518,839 3,204,305 1,382,576 2,114,695 6,043,407 32,263,822

1. Classification of the geographic segments is determined by geographical location.2. The principal countries and regions belonging to geographic segments other than Japan are as follows:

(1) Europe ..................................... U.K., Spain, Germany, Finland, the Netherlands(2) The Americas ........................... U.S.A., Canada(3) Others ...................................... China, Thailand, Vietnam, the Philippines, Singapore, Korea, Taiwan, Australia

3. Unallocated operating costs and expenses included in “Elimination & Corporate” for the years ended March 31, 2004, 2005 and 2006 were ¥61,032million, ¥58,324 million and ¥56,150 million ($475,847 thousand), respectively. Most of these costs and expenses were incurred as basic researchand development expenses and general and administrative expenses at the Company.

4. Corporate assets included in “Elimination & Corporate” at March 31, 2004, 2005 and 2006 amounted to ¥955,034 million, ¥927,300 million and¥932,190 million ($7,899,915 thousand), respectively. The assets principally consisted of working capital (cash and cash equivalents and short-terminvestments), long-term investments and miscellaneous assets held by the general and administrative sections at the Company.

5. Accounting principles and practices were changed from the year ended March 31, 2006 as stated in Note 1. (a) Basis of presenting consolidatedfinancial statements and the principles of consolidation (d) Revenue recognition (k) Provision for product warranties. As a result of these changes,sales to unaffiliated customers increased by ¥10,399 million ($88,127 thousand), operating income decreased by ¥1,463 million ($12,398 thou-sand) in “Japan,” and sales to unaffiliated customers decreased by ¥5,032 million ($42,644 thousand), operating income increased by ¥6,271 million($53,144 thousand) in “Europe.”

82 Fujitsu Limited

� Independent Auditors’ Report

� Principal Subsidiariesand Affiliates

Consolidated Subsidiaries■ JAPAN

ListedShinko Electric Industries Co., Ltd.Fujitsu Business Systems Ltd.Fujitsu Frontech Ltd.Fujitsu Access Ltd.Fujitsu Devices Inc.Fujitsu Component Ltd.Fujitsu Broad Solution & Consulting Inc.

UnlistedFujitsu Laboratories Ltd.Fujitsu TEN LimitedPFU LimitedFujitsu Support and Service Inc.Fujitsu Network Solutions LimitedFujitsu Media Devices LimitedFujitsu FIP CorporationNIFTY CorporationFujitsu IT Products Ltd.

*Fujitsu Display Technologies Corporation is no longer clas-sified as a consolidated subsidiary or an equity-methodaffiliate following the transfer of business in June 2005.

■ THE AMERICASUnlistedFujitsu Computer Systems CorporationFujitsu Network Communications, Inc.Fujitsu Consulting Holdings, Inc.

■ EUROPEUnlistedFujitsu Services Holdings PLCFujitsu Telecommunications Europe Ltd.

Equity-method Affiliates■ JAPAN

ListedFujitsu General Ltd.FDK Corporation

UnlistedFujitsu Leasing Co., Ltd.Eudyna Devices Inc.

■ THE AMERICASListedSpansion Inc.

■ EUROPEUnlistedFujitsu Siemens Computers (Holding) B.V.

� Shareholders’ Data(As of March 31, 2006)

Capital: ¥324,625 millionCommon Stock: Authorized: 5,000,000,000 sharesIssued: 2,070,018,213 sharesNumber of Shareholders: 228,350

Percentage of Number of total sharesshares held outstanding

Principal Shareholders (thousands) (%)

The Master Trust Bank of Japan, Ltd. (for trust) 188,609 9.11

Japan Trustee Services Bank, Ltd. (for trust) 109,159 5.27

Fuji Electric Holdings Co., Ltd. 94,663 4.57

Fuji Electric Systems Co., Ltd. 64,908 3.14

Asahi Mutual Life Insurance Company 40,299 1.95

Fuji Electric FA Components & Systems Co., Ltd. 36,886 1.78

Mizuho Corporate Bank, Ltd. 32,654 1.58

State Street Bank and Trust Company(Standing proxy, Mizuho Corporate Bank, Ltd.Kabutocho Custody & Proxy Department ) 31,314 1.51

Trust & Custody Services Bank, Ltd. (Trust Account B) 27,522 1.33

Fujitsu Limited Employee Shareholding Association 21,698 1.05Notes:1. Shares held by The Master Trust Bank of Japan, Ltd. (for trust), Japan Trustee Services Bank, Ltd. (for trust),

and Trust & Custody Services Bank, Ltd. (Trust Account B), are for the trust services of these banks.2. Of the shares held by Fuji Electric Holdings Co., Ltd., Fuji Electric Systems Co., Ltd. and Fuji Electric FA

Components & Systems Co., Ltd., 1,962 thousand, 64,487 thousand and 36,506 thousand shares, respec-tively, are trust assets that were entrusted to Mizuho Trust & Banking Co., Ltd. for retirement benefittrusts, and then re-entrusted to Trust & Custody Services Bank, Ltd. Voting rights for these shares areexercised in accordance with the directions of the respective companies who own the shares. Including theabove, the number of Fujitsu shares held by the Fuji Electric Group as retirement benefit trust assets total138,242 thousand shares (representing 6.68% of total shares outstanding).

3. Of the shares held by Mizuho Corporate Bank, Ltd., 212 thousand shares are trust assets that were en-trusted to Mizuho Trust & Banking Co., Ltd. for retirement benefit trusts, and then re-entrusted to Trust& Custody Services Bank, Ltd. Voting rights for these shares are exercised in accordance with the direc-tions of Mizuho Corporate Bank, Ltd.

4. Fujitsu received a large holding report (change in shareholding) dated January 1, 2006 from Barclays GlobalInvestors Japan Trust & Banking, Ltd. containing the following information accurate as of October 31,2005. Because Fujitsu is currently unable to verify the effective holding of Barclays Global Investors JapanTrust & Banking, the company has not been included in the above list of principal shareholders. The detailsof the large holding report (change in shareholding) are as follows:

Significant shareholder (joint shareholding): Barclays Global Investors Japan Trust & Banking, Ltd. and11 other companies

Number of shares held: 111,475,042Percentage of total shares outstanding: 5.39%

5. Fujitsu received a large holding report (change in shareholding) dated April 14, 2006 from Fidelity Invest-ments Japan Limited containing the following information accurate as of March 31, 2006. Because Fujitsuis currently unable to verify the effective holding of Fidelity Investments Japan, the company has not beenincluded in the above list of principal shareholders. The details of the large holding report (change inshareholding) are as follows:

Significant shareholder: Fidelity Investments Japan LimitedNumber of shares held: 82,838,000Percentage of total shares outstanding: 4.00%

■ Corporate HeadquartersShiodome City Center1-5-2 Higashi-Shimbashi,Minato-ku, Tokyo 105-7123, JapanTelephone: +81-3-6252-2220

■ Transfer AgentMitsubishi UFJ Trust and BankingCorporation4-5, Marunouchi 1-chome,Chiyoda-ku, Tokyo 100-8212, Japan

■ Stock Exchange ListingsJapan: Tokyo, Osaka, NagoyaOverseas: Frankfurt, London, Swiss

■ Independent AuditorsErnst & Young ShinNihon

■ Shareholder InformationFor further information,please contact:Fujitsu LimitedPublic & Investor RelationsTelephone: +81-3-6252-2173Facsimile: +81-3-6252-2783

http://www.fujitsu.com/global/about/ir/

All brand names and product names are trademarks and registered trademarks oftheir respective holders.


FUJIT

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Shiodome City Center, 1-5-2 Higashi-Shimbashi,Minato-ku, Tokyo 105-7123, JAPANTel. +81-3-6252-2220

www.fujitsu.com

©2006 FUJITSU LIMITEDPrinted in Japan BA0027-1AP

FUJITSU LIMITED

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